UK inflation forecast: where are prices heading next?

Inflation rose to 3.4% in December 2025, in line with analyst expectations, as a surge of festive shopping pushed up prices, according to the latest data from the Office for National Statistics (ONS).

CPI inflation increased by 0.2 percentage points when compared to November’s data. It was largely fuelled by price rises in the transport sector, especially airfares, where prices rose by 4% in December, up from 3.7% in November.

Inflation was also pushed up by an increase to tobacco duty that was introduced in November. Alcohol and tobacco prices increased by 5.2% in the 12 months to December, up from 4% in the year to November.

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Sanjay Raja, chief UK economist at Deutsche Bank, said the rise, which was the first increase in UK inflation in five months, was “always expected”. He added: “Indeed, seasonal factors almost always tend to push inflation higher, driven by travel and transport prices – alongside an unwind of discounting and promotional activity in November.”

December’s data bucked the trend of inflation either plateauing or falling, which has been the case since July 2025.

However, most forecasters think December’s rise will be very short-lived, with a sustained trend of falling inflation expected to return throughout 2026.

We look at where inflation may be going next, and what it could mean for interest rates.

When will inflation come down?

Inflation was briefly on a downwards path towards the end of 2025 after plateauing at 3.8% between July and September, a lower level than most analysts expected.

The two consecutive drops to 3.6% in October and 3.2% in November were also sharper than anticipated.

But with December’s rise to 3.4% bucking the trend, was falling price growth a temporary fad?

Most analysts believe the answer is no. Forecasters are virtually united in their belief that inflation is set to continue falling.

Raja at Deutsche Bank said: “While it may be a bumpy path, we expect disinflation to continue at pace. Why? Negative base effects will likely kick in over the course of the year. Food prices will also likely follow producer and wholesale prices. And government policy measures should reinforce the drop in energy and services prices.”

December’s inflation figures did lead Deutsche Bank to slightly alter their inflation predictions to the upside. They revised their 2026 average inflation forecast up 0.1 percentage points from 2.3% to 2.4%.

Alice Haine, personal finance analyst at Bestinvest, agrees that inflation is set to fall over the course of 2026. She said: “The December uptick is expected to be short-lived, with the slowdown in price pressures seen in the final few months of 2025 set to resume this year.

“The combination of tax rises and spending restraints introduced in the Autumn Budget, along with a cooling labour market and slowing wage growth, are likely to act as a drag on prices.”

Haine said underlying inflationary pressures are continuing to ease, bolstering further disinflationary progress.

“Core inflation, which strips out more volatile items such as food, alcohol and tobacco, held steady at 3.2% in December from 3.2% in November, though services inflation edged up to 4.5% from 4.4%, signalling a broader cooling in domestically driven price pressures,” she added.

Measures announced in the Autumn Budget are also expected to put a further downward pressure on inflation.

The main measures announced in the Budget that are expected to to help curb inflation include: extending a 5p cut in fuel duty, the removal of green levies on energy bills, scrapping a customer-funded home insulation scheme, and the freezing of rail fares until March 2027.

In all, the disinflationary policies announced in the Autumn Budget are expected to push price growth down by around half a percentage point, according to analysis by the Bank of England.

Overall, most forecasters also believe that the UK is at the end of its most recent inflationary cycle.

Every economist surveyed by the Treasury on 21 January said they predicted inflation will be lower at the end of 2026 than it was at the start.

The average prediction between them was that inflation would average 2.2% in the final quarter of the year.

The Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, also agrees with this consensus, though it predicts inflation in Q4 2026 will reach 2.1%, 0.1 percentage point below the average forecast.

The Bank of England also shares the consensus that inflation will fall throughout 2026, expecting it to reach the 2% target by early 2027.

The central bank published short-term forecasts with its Monetary Policy Report in November 2025. They forecast inflation would come in at 3% in January, 3.1% in February, and 3.2% in March.

What’s the link between inflation and interest rates?

Inflation above the 2% target is always a cause for concern for economists, policymakers and consumers.

The Bank of England is particularly focused on inflation, as it has a remit to guide and control inflation so prices do not spiral out of control.

This is largely done through influencing interest rates, which are typically raised to fight inflation.

Broadly speaking, the trade-off to fighting inflation with higher interest rates is reduced economic activity. When interest rates are high, people have to use more of their earnings on expenses like their mortgage and are incentivised to save their cash as savings rates tend to be higher.

However, despite inflation having been above target for all of 2025 and forecast to stay higher than 2% for most of 2026, the Bank of England has been gradually cutting rates since the summer of 2024.

What does falling inflation mean for future interest rate cuts?

The Bank of England chose to cut interest rates to 3.75% at the most recent Monetary Policy Committee (MPC) meeting on 18 December, one day after November’s inflation data (which showed inflation fell to 3.2% in the year to November) was released.

The 25 basis point cut brought the bank rate to the lowest it has been since February 2023.

The vote to cut was narrowly passed by five to four, with governor Andrew Bailey having the deciding vote to cut despite a large faction in the MPC wanting to hold rates at 4%.

In the previous meeting in November, the MPC held rates at 4%, also passing by 5-4.

The reason the December cut was able to be passed was largely due to Andrew Bailey’s belief that disinflation is now “more established” in the economy.

The central bank’s next interest rates decision will be announced on 5 February, and the MPC will be poring over the latest inflation figures.

But will December’s rise hinder further interest rate cuts? Probably not.

Raja at Deutsche Bank said “more rate cuts are likely” despite the uptick in CPI as inflation is forecast to continue falling. The bank still expects the base rate to continue in a downward direction and predicts a rate cut in March and June.

There is, however, an increasing sense among economists that the base rate is coming closer to the neutral level of interest in the economy, potentially meaning that decisions to cut, hold, or raise could become more limited.

When the central bank made its last interest rate decision in December, Raja said: “As we inch our way towards a more 'neutral' policy setting, we think policy divisions will narrow over 2026.

“The scope for more rate cuts is limited, with the Bank sending its most explicit message yet on the path for policy: ‘judgements around further policy easing will become a closer call.’”