It looks like Christmas has taken its toll on UK inflation. It’s been reported today that UK inflation rose faster than expected in December, raising questions for investors and portfolio managers about the outlook for interest rates, fixed income returns, and broader asset allocation in the weeks and months ahead.
The Office for National Statistics reported that the Consumer Prices Index (CPI) increased by 3.4% in the 12 months to December 2025, up from 3.2% in November. Rising costs for airfares and tobacco contributed to the uptick, as seasonal effects linked to the Christmas period played a role. Despite these nuances, the data signals that inflationary pressures remain firmly in play as the Bank of England’s Monetary Policy Committee prepares for its February meeting, and that all important interest rate decision. Needless to say, today’s news hasn’t boosted the case for a cut!
For investors and wealth managers, the numbers are more than just statistics: they feed directly into decisions on asset allocation, income strategies, and inflation hedging. Whilst this latest uptick is largely seen as a temporary hike – it’s expected that inflation will head down towards 2.5% by year end – it’s still likely to cause some consternation amongst investors.
With all the geo-political uncertainties right now, the latest inflation data is just another factor to take into account in the tricky business of delivering effective long term investment returns.
Experts across investment management have shared their reactions to the latest inflation figures, highlighting how portfolios may need to adapt in the months ahead:
Luke Bartholomew, Deputy Chief Economist, at Aberdeen said;
“Given the rapid fall in inflation in recent months, a small bounce higher in headline inflation was always likely. And the fact that the bounce was largely driven by highly volatile airline fares means policymakers and the market are likely to look through this noise. Indeed, with the crucial services inflation component a little softer, the big picture is that inflation is on track to return to 2% later this year. With yesterday’s jobs data showing that the labour market remains weak, the pieces are still very much in place for further Bank of England easing. However, today’s data probably do now firmly rule out a February cut, with the next rate reduction probably set for March instead.”
Responding to today’s figures, Isabella Galliers-Pratt, Senior Investment Director at Rathbones, said: “This morning’s inflation data delivered a mild setback, with the annual CPI rate rising to 3.4% in December, up from 3.2% in November. It’s a reminder that, despite some encouraging progress in recent months, inflation remains stubbornly elevated at a time when the Chancellor is trying to steady the public finances.
“The increase was driven largely by services and by further rises in food prices — notably bread and cereals — which continue to squeeze household budgets already under strain from the cost-of-living pressures.
“Whilst conflicting forces will shape the inflation outlook over the rest of the year — with cuts to energy bills and freezes on rail fares and prescription charges offering some relief, but minimum wage increases, National Insurance changes and higher business taxes adding upward pressure — the overall impact is likely to remain finely balanced.
“Today’s reading further complicates the position for the Bank of England, who need to juggle the cooling labour market, where private sector wage growth fell to its weakest level in five years, and payrolls dropped by 43,000 — the sharpest monthly fall since 2020, with an increasingly sticky inflationary backdrop, which will limit their room to manoeuvre.
“Today’s rise, though modest, reinforces a broader theme: inflation has been more persistent than many hoped. And with geopolitical uncertainties adding further pressure on global supply chains, the outlook for imported inflation remains unsettled.
“For now, the path back to more comfortable inflation levels is still in sight, but it may take longer than expected and progress is unlikely to be linear.
Commenting on latest inflation figures, Jonathon Marchant, Fund Manager at Mattioli Woods, said: “This morning’s UK CPI data showed inflation running at 3.40% year-on-year, exceeding the 3.30% consensus forecast. Notably, core inflation of 3.20% was slightly below expectations. While last week’s GDP numbers also came in ahead of expectations, they were flattered by the rebound in activity following Jaguar Land Rover’s cyber-attack. Recent jobs data showed permanent staff placements falling again in December and private weekly earnings fell back to +3.6% yesterday, undershooting consensus expectations.
When combined with various confidence surveys, the data continues to paint a relatively gloomy picture. Prior to the release, markets were expecting the next interest rate cut to fall in April. Today’s print will do little to change that view, though recent commentary suggests that central bankers expect to hit their target inflation level this year, ahead of schedule. While the data is far from positive, it is not concerning. Lower interest rates remain vital to increasing spending and domestic activity, which we believe is supportive for the mid and small cap space.”
Commenting on this morning’s Consumer Price Index data, Charlie Ambler, Co-Chief Investment Officer, Partner at wealth management firm Saltus, said: “Headline inflation has edged higher this month, driven by seasonal pressures in travel and food prices over the festive period. Although markets will be unlikely to respond well, with the Bank of England previously signalling inflation would follow a downward trajectory this year, it does not signal a renewed problem in itself.
“Policy remains finely balanced. The Bank’s ability to continue easing hinges on controlling services inflation and wage growth, rather than short term volatility in headline numbers. December’s rate cut signalled growing confidence that underlying pressures are cooling, and the fiscal tightening announced in the Autumn Budget should reinforce that disinflationary impulse over time. Near term rises in inflation are therefore more likely to be treated as noise as opposed to a change in direction.
“For investors, inflation remains above the 2% target, and the risk of renewed pressure later in 2026 cannot be ignored. Safe-haven demand has been evident, with gold prices hitting fresh record highs, but a more stable rate outlook also creates selective opportunities in interest-rate-sensitive sectors and UK equities as markets look beyond short-term data volatility.”
A temporary rise in consumer prices before sharper falls to come in 2026 – Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services
“The end of 2025 saw UK inflation inch higher, closing out at 3.4%, just short of the Bank of England’s 3.5% target. This uptick was widely expected given that November’s ONS figures preceded the Budget’s tobacco duty increase and the unwinding of Black Friday discounts. Core prices remained stable from November, though we have seen a pick-up in service sector prices to 4.5%, just shy of the Bank’s 4.6% forecast.
“Rate-setters noted at their December meeting that Budget measures would lower CPI inflation modestly from April, when the inflationary impact of measures from 2024’s Autumn Budget will drop out of year-on-year calculations, before adding marginally to price pressures in 2027 and 2028.
“Today’s confirmation of higher prices during December was foreshadowed by PMI surveys which showed businesses were identifying a sharp strengthening in input prices as the year closed, and a concomitant rebound in output prices.
“In a speech last week, MPC member Mr Alan Taylor indicated he was still comfortable with the Bank’s expectation that CPI inflation would drop to target levels of 2% in mid-2026. With the Committee having cut the UK’s base rate for a sixth time in the current cycle, it seems unlikely they will vote to cut consecutively at its next meetings in the coming months. However, the meeting at the end of April is a different story, with confirmation of easing price pressures setting the stage for a further mid-year rate cut. Financial markets have already priced in this assumption, but weaker than expected price pressures might rule in an eighth and final cut in late Q3, rounding off the year.”
Derrick Dunne, CEO of You Asset Management, comments: “Inflation took a surprise uptick in December which could now preclude any chances of a rate cut in early February. The Bank of England’s Monetary Policy Committee (MPC) was finely balanced at its last meeting, making the likelihood of more ‘wait and see’ stronger given these numbers.
“That being said, some of what drove price rises in December was circumstantial, including duty-linked tobacco price increases and air fares falling on dates that distort the year-on-year comparisons. Rising food costs is a worry – but is ultimately a volatile and unreliable measure of the overall direction of travel.
“Perhaps indicative of this, core inflation has stood still. While it would be preferable to see this fall – this is still better than an increase. All in though it does point clearly that the inflation game is not yet run.
“Rate setters will be moving with an abundance of caution. If they do plump for a surprise cut on 5 February, it will be with rising unemployment and flatlining GDP in mind. Looking through inflation figures in this way is however a risky business. Forward-looking expectations for inflation are still for it to fall further, what matters now is the pace of that decline.
