UK inflation rises by more than expected to 3.4%

British consumer prices rose by more than expected in December but services inflation, closely watched by the Bank of England, came in as forecast by analysts, official data showed on Wednesday.

Annual consumer price inflation rose to 3.4% from 3.2% in November, the Office for National Statistics said.

A Reuters poll of economists had shown a median forecast of a rise in consumer price inflation to 3.3%.

Services inflation, watched as a gauge of domestically-driven price pressure, rose to 4.5% in December from 4.4% in November, as expected in the poll.

Inflation in Britain remains the highest in the Group of Seven, despite the country's sluggish economic growth.

But the pace of price increases is expected to slow sharply in the coming months as last year's rises in utility costs and other government-controlled tariffs fall out of the annual comparison.

Bank of England Governor Andrew Bailey has said inflation is likely to be close to the central bank's 2% target in April or May.

The pound showed little reaction to the data.

As many economists had predicted, tobacco and airfares were among the biggest contributors to the headline rise in consumer prices in December.

However, Britain's consumer price and services inflation rates are running slightly below those projected by the BoE in its November forecasts.

Financial markets are pricing one or possibly two quarter-point interest rate cuts by the BoE in 2026.

In December, the BoE's Monetary Policy Committee cut Bank Rate to 3.75% but almost half its members voted for no change due to worries about the persistence of inflation pressure.

-Andy Bruce/Reuters