The longer-term UK inflation outlook
Analysts at the Bank of England expect UK inflation to fall to 3.1% in the first quarter of this year, and to fall below 3% in the second quarter. Inflation is expected to average 2.5% in the final quarter of the year.
In Q1 of 2027, the bank forecasts that inflation will have fallen to close to its target rate of 2%, and that it will fall below it the following quarter.
What is CPI inflation?
A fall in inflation doesn’t indicate a fall in prices, unless the inflation number turns negative (which is known as deflation). But a fall in inflation from, say, 3% to 2% means that prices still rose, just at a slower rate than in the previous period.
There are various different ways to measure inflation. The Consumer Prices Index (CPI) is viewed as the key metric by economists, but there are others including Consumer Prices Index including owner occupiers’ housing costs (CPIH), which includes the costs of owning, maintaining and living in a home, and the Retail Prices Index which includes costs associated with home ownership.
UK inflation's recent history
Following the Covid pandemic, inflation was running at historically low levels – just 0.2% in August 2020. Most economists would argue that inflation rates this low are economically unhealthy; 2% is regarded as the optimal rate, which is why the Bank of England targets this level.
From the second half of 2021, though, the rate of inflation rapidly passed beyond this optimal rate, peaking at 11.1% in October 2022.
Since then, inflation has gradually been trending downwards. The 2024 Autumn Budget caused a temporary bump as inflationary measures like increased employer National Insurance contributions came into effect from April, but following a three-month plateau at 3.8% over the summer, inflation now appears to be coming down.
Economists expect UK inflation to have risen in December
These forecasts are a little dated – they were included in the Monetary Policy Report that accompanied the MPC’s last-but-one meeting, on 5 November. There have been two inflation data releases (covering October and November) since then, and both reads undershot expectations.
There is some uncertainty over the date on which inflation data will have been gathered; 9 December would be four weeks after the previous data collection, but it is unusually early in the month.
The alternative, 16 December, is a more appropriate date but would make it the fifth five-week gap between collections of 2025, and it is unusual to have that many five-week gaps in a calendar year.
The collection date could materially change the outcome, as prices tend to increase in the run-in to Christmas.
Robert Wood, chief UK economist at Pantheon Macroeconomics, forecasts CPI to have risen 3.3% assuming that data is collected on 9 December, rising to 3.4% if it is collected on 16 December.
Sanjay Raja, chief UK economist at Deutsche Bank, expects a headline CPI inflation figure of 3.4%, though he said this could be higher if (as he expects) data is collected on the later date.
Good afternoon, and welcome to our coverage of the latest UK inflation data.
But December’s read could paint a gloomier picture. The Bank of England’s latest available projections (dated 5 November) expect CPI to have risen to 3.5% in the 12 months to December, and other analysts also expect UK inflation to have risen from the previous month.
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