U.K. inflation climbed to 3.4% in the year to December, marking the first increase in five months, according to official figures. The rise, fueled by higher tobacco prices and airfares, exceeded economists' expectations, who had predicted a more modest uptick to 3.3%.

Despite the unexpected jump, analysts believe that one-off factors, such as increased flight costs during the Christmas season and a hike in tobacco tax announced in the Budget, are primarily responsible and do not signal a sustained upward trend. Michael Saunders, a former rate-setter at the Bank of England, echoed this sentiment, stating that the increase "is not the start of a new upward trend, it reflects a variety of fairly temporary erratic factors."

The inflation data precedes the Bank of England's upcoming meeting on February 5, where policymakers will decide on interest rates. The Bank concluded 2025 by reducing borrowing costs to 3.75%. The recent inflation figures may influence the Bank's decision-making process. Saunders suggested that a rate cut in February is unlikely, but he anticipates "gradual" cuts later in the year.

The rise in inflation could have a tangible impact on consumers, particularly those with lower incomes, as it erodes purchasing power and makes everyday goods and services more expensive. The increase in tobacco prices, driven by tax increases, may also affect smoking habits and potentially encourage some individuals to quit.

The Bank of England's Monetary Policy Committee will closely monitor inflation data and other economic indicators to determine the appropriate course of action regarding interest rates. Their decisions will have significant implications for businesses, consumers, and the overall economy.