Inflation rose to a higher-than-expected 3.4% in the year to December, up from 3.2% the preceding month, dimming hopes that we might see an interest rate cut in February.
The Consumer Prices Index (CPI) measure of inflation was pushed up by a combination of higher food prices and airfares, alongside steeper tobacco and alcohol costs, according to the Office for National Statistics.
The Retail Prices Index, which includes mortgage interest payments and other housing-related costs, saw a sharper jump, rising from 3.8% in the 12 months to November to 4.2% in December.
Despite this uptick, CPI inflation is widely expected to resume its downward trajectory in coming months, until it reaches the government’s 2% target. However, this will depend on many factors, including what happens to energy prices, wage growth and how quickly earlier interest rate rises continue to feed through into the wider economy.
What this means for mortgage rates
Although higher inflation has made it less likely that we’ll see a base rate reduction when the Bank of England’s Monetary Policy Committee next meets on 5th February, markets are still expecting a couple of rate reductions this year. They continue to price in a slower easing of rates rather than rapid cuts, reflecting caution among policymakers.
The good news for homebuyers and those looking to remortgage is that mortgage rates have already eased noticeably following four rate reductions in 2025, the latest in December. Fixed rate mortgages have continued to improve into the New Year and are currently at their lowest level since 2022.
