UK inflation unexpectedly rose to 3.4 per cent in December, up from 3.2 per cent in November and above the 3.3 per cent forecast, driven mainly by higher tobacco prices and costly airfares. This keeps inflation above the Bank of England's 2 per cent target and complicates the outlook for interest rate cuts. Core inflation, which excludes food, energy, alcohol and tobacco, remained at 3.2 per cent, while services inflation inched up to 4.5 per cent, pointing to underlying price pressures. The Bank of England had forecast easing inflation in early 2026 and cut rates to 3.75 per cent in December, but markets now expect the next move could come in June rather than February. The pound was little changed and broader market reaction muted, reflecting uncertainty over future monetary policy and a still subdued UK economy.