Annual inflation in the United Kingdom jumped more than expected to hit a 10-month high of 3.0% in January, official data showed on Wednesday, and it is likely to rise further soon, testing the confidence of the Bank of England (BoE) that price pressures are on a downward path over the longer term.
The BoE and economists polled by Reuters had expected inflation to rise by less, to 2.8%, after December's reading of 2.5%.
The Office for National Statistics (ONS) said the increase in January was mainly driven by a smaller-than-usual drop in airfares that month – a volatile component that had pushed inflation down in December – and a rise in automotive fuel prices.
Food prices also rose, while another factor was the increase in private school fees after the decision by the government of Prime Minister Keir Starmer to charge value-added tax on them.
"The rise was driven by airfares not falling as much as we usually see at this time of the year," noted Grant Fitzner, chief ONS economist.
"After falling this time last year, the cost of food and nonalcoholic drinks increased, particularly meat, bread and cereals," he added.
Overall, services prices – which feature prominently in the debate at the BoE about how quickly to cut interest rates – rose sharply to 5.0% from 4.4%, but by less than the 5.2% rate expected by economists or the central bank.
The reading comes as a blow to Starmer's center-left government as it tries to tackle the dual pressures of rising prices and slow economic growth.
The Sterling momentarily strengthened against the dollar after the figures were published before quickly settling back to its pre-release level.
The latest figure pushes inflation away from the Bank of England's 2% target but remains broadly in line with the central bank's forecasts for the year, analysts said.
"While it's not going to set off a cacophony of alarm bells at the Bank of England, it's not going to make them any more enthusiastic about rate cuts in the immediate future either," said Sarah Coles, head of personal finance at Hargreaves Lansdown.
Zara Nokes, global market analyst at JPMorgan Asset Management, said the higher-than-expected headline inflation rate, combined with strong wage growth figures announced on Tuesday, would cause "quite the headache" for the BoE.
"With the hike in employer taxes and the minimum wage increase still coming down the tracks, it is hard to see how inflation dynamics will improve meaningfully in the near term," Nokes said.
Finance Minister Rachel Reeves' decision to increase employers' social security contributions comes into effect on April 1 when Britain's minimum wage is also due to rise by almost 7%, raising questions about how much the increased costs for businesses will feed into prices.
Ruth Gregory, an economist with Capital Economics, said she still thought the BoE would continue to cut borrowing costs gradually, but "the risk is that the rise in inflation proves more persistent and rates are cut more slowly than we expect, or not as far."
"Getting more money in people's pockets is my number one mission," Reeves said in response to Wednesday's figures.
"That's why we're going further and faster to deliver economic growth," she added.
In February, the central bank slashed its forecast for U.K. economic growth and warned that inflation would rise more than expected this year, blaming global risks amid U.S. tariff threats and deteriorating business confidence in the U.K.
It also lowered its key rate by a quarter point to 4.5% earlier in February, the third cut in six months.
Yet, BoE Governor Andrew Bailey has cautioned that the central bank would take a "gradual and careful" approach to reducing rates further.
The BoE forecasts that consumer price inflation will peak at 3.7% in the third quarter of 2025, driven mostly by higher energy costs and regulated tariffs for items such as domestic water supply.
However, Bailey and his colleagues say an expected slowdown in the jobs market will likely keep a lid on higher wage demands this year, limiting the risk of a build-up of inflation pressure.
Core inflation, which excludes energy, food, alcohol and tobacco prices, rose to 3.7% from 3.2% in January, in line with the Reuters poll.
