Inflation in the UK - Where We Stand Now and What Comes Next

27th December 2025

Inflation has become one of the most pressing economic issues in the United Kingdom over the past few years, shaping the lived experience of consumers, workers, businesses, and policymakers alike.

After reaching historic highs at the end of 2022, inflation rates have eased but remain a significant force in 2025.

The most recent figures from the Office for National Statistics show that consumer price inflation, as measured by the Consumer Prices Index (CPI), fell to around 3.2 per cent in November 2025, a notable drop from earlier in the year but still above the Bank of England's target of about 2 per cent.

This persistent elevation reflects the complex interplay of global shocks and domestic pressures that continue to push up prices for everyday goods and services.

Historically, UK inflation was relatively subdued in the decade before the COVID-19 pandemic. However, the economic disruption of 2020 and 2021, followed by energy price shocks driven by geopolitical conflict, sent inflation soaring to levels not seen for decades, peaking at approximately 11.1 per cent in October 2022.

Since then, inflation has gradually receded, yet its path has not been smooth, with periods of renewed price increases in 2025 reflecting underlying pressures that have yet to fully dissipate.

Understanding the drivers of inflation in the UK requires looking beyond a single cause. Food prices have been a persistent contributor, with several ONS data releases indicating that food and non-alcoholic beverage costs rose by over 5 per cent in parts of 2025 — a rate faster than overall inflation.

Elevated costs for essentials such as bread, meat, and dairy have placed a particular strain on household budgets. In addition, regulated increases in household bills — most notably for water and energy — have added to the upward pressure on the cost of living, amplifying the effect of broader price rises.

Services inflation has also remained stickier than many economists expected, as sectors such as hospitality, transport, and personal services pass on higher labour and operating costs to consumers.

Labour market conditions have played a significant role in this dynamic. Wages have risen in response to labour shortages and the increased cost of living, but in many sectors wage growth has not kept pace with price increases.

This imbalance has meant that households feel squeezed even when nominal pay packets are larger. At the same time, businesses facing higher input costs are often forced to raise prices to maintain profit margins, feeding into a cycle of persistent inflationary pressure.

The Bank of England has responded to high inflation with a combination of interest rate adjustments and careful policy signalling. After a period of sustained rate rises designed to cool demand across the economy, the Bank began to pivot toward rate reductions as inflation showed signs of moderating. In December 2025, for example, the Bank cut its benchmark interest rate from 4 per cent to 3.75 per cent, reflecting easing price pressures and concerns about slowing growth.

These adjustments influence borrowing costs for households and businesses alike, with lower interest rates easing the cost of mortgages and loans but potentially risking a resurgence in inflation if stimulus comes too soon.

The impacts of inflation extend deeply into everyday life, particularly for low-income households. Those on modest incomes spend a larger proportion of their budgets on essentials such as food, utilities, and housing. Data on household cost indices reveal that lower-income households experienced an inflation rate of about 4.1 per cent in mid-2025 — higher than that of wealthier households.

This disproportionate burden means that even modest price increases can translate into real hardship, forcing families to make difficult trade-offs between necessities. As inflation erodes purchasing power, many households have seen their real incomes stagnate or decline, reducing their ability to save and invest for the future.

The wider economy has also felt the effects of sustained inflation. In late 2025, growth in gross domestic product was sluggish, reflecting weak consumer demand and broader economic headwinds. Reuters reported that households were cutting back on savings as prices ate into disposable income, while businesses faced greater uncertainty in planning investment and hiring.

These conditions reflect the broader challenge known in economic circles as the "cost-of-living crisis," where even falling or stable reported inflation rates mask the cumulative burden of years of elevated prices experienced by consumers.

Looking forward, many forecasters expect inflation to continue its downward trajectory toward the Bank of England's target in 2026, but this path is far from guaranteed. Structural issues such as productivity, supply chain bottlenecks, and the global energy landscape remain critical variables that could shape inflation's future course. The Bank of England's evolving policy framework — which now includes a broader set of scenarios rather than a single forecast — underscores the uncertainty inherent in navigating a return to stable prices without undermining growth.

In summary, inflation in the UK remains a defining economic challenge in 2025. While headline rates have moderated from their recent highs, the causes of inflation are multifaceted and deeply rooted in both global and domestic forces.

The response from policymakers, including interest rate shifts by the Bank of England, reflects a balancing act between containing prices and supporting growth.

For consumers, particularly those on lower incomes, the lived reality of inflation has meant harder choices and tighter household budgets. As the UK moves into 2026, both the trajectory of inflation and its broader economic consequences will remain central to public debate and policy.

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