What sticky inflation means for you: CPI rises to 3.4% - what happens next?

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Inflation overshot expectations in December, rising from 3.2 per cent to 3.4 per cent driven by higher air fares. 

The Consumer Prices Index (CPI) has steadily been falling but has stubbornly stayed above the Bank of England's 2 per cent target. 

After months of 'sticky' inflation readings, another increase in the headline rate will concern the central bank as prices are increasing more than they should. 

December's headline inflation rate is ahead of expectations, with the market pricing in a small uptick to 3.3 per cent driven by higher air fares in the run up to Christmas. 

What do the latest inflation figures mean for you, where does this leave the Bank of England on interest rate hikes, and will inflation stay at a higher rate? We look at all this and more.

Weekly shop: High inflation has hit our household bills in recent years, from energy to food

What's the latest on inflation?

The headline inflation rate increased after two consecutive months of falling, driven by the Chancellor's tobacco duty hike and higher air fares. 

Core inflation - which excludes volatile items like food, energy and alcohol - was steady at 3.2 per cent in the 12 months to December, its lowest rate in a year. 

Services inflation inched up from 4.4 per cent to 4.5 per cent.

Food and non-alcoholic beverages saw another increase after a huge downward contribution to CPI in November. 

Groceries increased from 4.2 per cent to 4.5 per cent, while alcohol and tobacco prices jumped from 4 per cent to 5.2 per cent.   

Transport also rose from 3.7 per cent to 4 per cent, while restaurant and hotel inflation increased 3 percentage points to 3.8 per cent. 

Grant Fitzner, chief economist at the ONS, said: 'Inflation ticked up a little in December, driven partly by higher tobacco prices, following recently introduced excise duty increases.

'Airfares also contributed to the increase with prices rising more than a year ago, likely because of the timing of return flights over the Christmas and New Year period. Rising food costs, particularly for bread and cereals, were also an upward driver.

'These were partially offset by a fall in rents inflation and lower prices for a range of recreational and cultural purchases.

Fitzner added: 'The annual increase in the prices for goods leaving factories was unchanged this month while the increase in the cost of raw materials for business slowed, driven by lower crude oil prices.'

What does the inflation rate mean for you?

Consumer prices inflation, known as CPI, measures the average change in the cost of consumer goods and services purchased in Britain, with the ONS monitoring a basket of goods representative of UK consumers.

Monthly change figures are given but the key measure that is watched is the annual rate of inflation. The Bank of England has a target to keep this at 2 per cent. 

An inflation spike has hit over the last two years or so, with the CPI rate peaking in October 2022 at 11.1 per cent. 

Higher inflation means the rate of increase in the cost of living is increasing.

Any decline in the inflation rate is to be celebrated though, as it increases the chance of wages, investment returns and savings interest matching or beating inflation - delivering a real increase in people's wealth.

> The best inflation-fighting savings deals 

The main measure by which the Bank of England seeks to control inflation is interest rate rises. Higher inflation decreases the chance of base rate cuts and increases expectations of how high rates will go. 

Expectations that the Bank of England would have to keep raising rates to combat inflation have sent mortgage rates spiralling costing mortgaged homeowners dear.

> How much would a mortgage cost you? Check the best rates 

Will inflation fall again? 

The key question is whether inflation has hit its peak and will start to fall again over the coming months.

December's inflation reading was ahead of consensus, almost a percentage point ahead of what economists had predicted. 

There will be disappointment that there was another uptick in services inflation, which the central bank will look closely at before making a decision on whether to cut the base rate. 

Lindsay James, investment strategist at Quilter anticipates inflation could fall 'more sharply' over the next year, with the BoE predicting a fall to 2.5 per cent by the end of the year.  

'At the same time, those forecasts also assume only weak GDP growth and a stable unemployment rate, with risks arguably now tilted to the downside after several months of disappointing labour market data,' she added. 

ING analysts predict xxx 

Rob Wood, chief UK economist at Pantheon Macroeconomics expects inflation to slow again in January but remain at or above 3 per cent, 'until a sharp drop in April, when the Chancellor’s utility bill cut kicks in. 

'We think inflation will reach a low of 2.1 per cent in July before rising in the second half of the year, as administered price hikes once again add to inflation. 

'All told, with underlying pressure slowing only gradually, we expect headline inflation to end the year at 2.8 per cent.' 

Will the Bank of England cut rates again? 

The Monetary Policy Committee cut rates in December's meeting after November's slowing inflation reading. 

While economists expect more one or two more rate cuts this year, they think that the Bank might press pause at their February meeting and may wait until June. 

Grim faces: The Bank of England is likely to cut the base rate next month after CPI reading

'The number today justifies the central bank’s cautious stance, and pours cold water on rate cut expectations,' said George Lagarias, chief economist at Forvis Mazars. 'Still, we remain optimistic that prices will subside, and rates will fall in 2026, as a result of wage cooling and more muted economic growth.'

ING analysts say BoE officials 'will want to see more progress on services inflation. And given officials have hinted at a slower pace of cuts, we doubt the Bank will do anything other than keep rates unchanged at its next decision.'

They added: 'We think that if the weak hiring backdrop and benign wage growth trend continues over the next couple of reports, the Bank will be comfortable cutting rates in March.  

'Then, if we’re right about the April inflation data, it should feel able to cut rates again in June. That would leave the Bank Rate at 3.25 per cent.' 

What does it mean for your savings?

Inflation means the value of interest earned on savings and investments falls in real terms.

If inflation deters the Bank from cutting its base rate again, then there is a silver lining for savers as rates will remain at a higher level.

However, rising prices erode the real value of people’s savings.

Mark Hicks, head of Active Savings, Hargreaves Lansdown: 'There has been a lot of water under the bridge since these figures were collected in December. Global political news has been unsettling, and I expect that will affect base rate forecasts in the short term.

'The market isn’t expecting rate rises until April, which should open a window of opportunity for those who want to take advantage, and lock in a great fixed deal, before the Bank starts to cut rates. 

'Many fixed-term savings products continue to offer returns of over 4%, providing an opportunity to secure above-inflation and above-base-rate returns while they last.'

> Check the best savings rates in This Is Money's independent tables

What does it mean for your mortgage?

Peter Stimson, director of mortgages at MPowered said: 'The prospect of a February base rate cut is fading faster than many people’s New Year gym attendance.

'At the start of the year it had seemed like a genuine possibility, albeit a modest one.

'As swap rates held steady in the first weeks of January, many of the biggest lenders started 2026 by shaving their fixed interest rates in an effort to steal a march on each other. 

'That ratecutting momentum could now stop in its tracks and the great deals we’ve seen in recent days may be short-lived.'

> Compare the best mortgage rates based on your home's value and loan size