Inflation measures how the price of goods and services has changed over time, with data released by the Office for National Statistics (ONS) every month
UK inflation rose to 3.4% in December, largely driven by higher tobacco and airfare prices.
This is up from the 3.2% that was recorded in November when inflation dipped to an eight-month low. The majority of economists had expected inflation to creep higher in December.
Inflation measures how the price of goods and services has changed over time, with data released by the Office for National Statistics (ONS) every month.
The ONS said the December rise was linked to an increase in tobacco duty, which pushed up cigarette prices, along with more expensive airfare prices during the Christmas and New Year period.
It also noted higher costs of some foods, including bread and cereals. But it said this was partially offset by a fall in rent, and lower oil costs, which helped drive down the price of raw materials for businesses.
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 by 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.
“The annual increase in the prices of good leaving factories was unchanged this month while the increase in the cost of raw materials for business slowed, driven by lower crude oil prices.”
How does inflation impact me?
Inflation shows you how much more expensive something is compared to last year. For example, if inflation is 3% and an item cost £1 last year, it means that item would cost £1.03 now.
But importantly, when inflation goes down, it does not mean prices have stopped rising – it just means they are still going up, but just more slowly than below. If prices went down, you would be called deflation, and this is when inflation falls below 0%.
The ONS calculates inflation based on a regularly updated “basket of goods” and services that represents what households are buying.
The main inflation figure you see in headlines is used to represent an average. This means the individual prices of some goods may be higher or lower than this main figure.
How is inflation linked to interest rates?
The Bank of England has a target of 2% inflation. It had increased interest rates over the course of almost two years to try and lower inflation back to this target.
The idea is that, when interest rates are higher, borrowing becomes more expensive and this means people have less money to spend elsewhere. When people spend less money, this brings down demand and lower prices, which lowers inflation.
But a higher base rate pushed up mortgage payments for millions of homeowners, leaving households financially stretched. The base rate stood at just 0.1% in December 2021.
It reached a peak of 5.25% in August 2023 but has since been cut six times to its current level of 3.75%.
When did inflation reach a peak?
Inflation began to rise in 2021 and peaked at 11.1% in October 2022. The steady increase was largely due to higher costs of energy and food.
Demand for energy increased after Covid and then this was exasperated by the Russian invasion of Ukraine. The war also pushed up food prices, due to rising costs for fertilisers and animal feed.
Inflation fell to its lowest level in three years in September 2024 when it dropped to 1.7% but it started to creep up again the following month in October 2024.
