When new data from the Office for National Statistics (ONS) confirmed on January 21, 2026,
that UK inflation had risen to 3.4%, it did not trigger panic. But it did trigger concern.
After five straight months of falling prices, the increase from 3.2% in November marked a clear break in the trend and reinforced a growing problem for Britain: while inflation is no longer raging,
it is proving stubbornly difficult to finish off.
At a moment when other major economies are cooling, the UK is once again the inflation outlier among the G7.
What Pushed Inflation Higher?
The December increase came in slightly above expectations, with most City economists forecasting 3.3%. Core inflation stripping out food and energy held steady at 3.2%, but several pressures pushed the headline figure up.
- Air fares surged 28.6%, reflecting holiday travel demand and comparisons with unusually low prices in late 2024.
- Tobacco prices jumped, after higher duties announced in the autumn budget came into force. The “alcohol and tobacco” category rose to 5.2%, up from 4.0%.
- Food inflation climbed to 4.5%, driven by rising prices for bread and cereals, intensifying pressure on household budgets.
Individually, none of these factors signal runaway inflation. Together, they underline why price pressures remain “sticky,” particularly in services.
The Davos Dilemma for Rachel Reeves
The timing could hardly be more awkward for Chancellor Rachel Reeves, who is in Davos this week seeking to sell Britain as a stable destination for global investment.
Within hours of the inflation data being released, Reeves reiterated her pledge that 2026 will be the year Britain “turns a corner” on inflation, pushing back against the narrative that the recovery is stalling even as prices ticked higher.
The challenge is credibility. While speaking on panels alongside global business leaders, she faces fresh evidence that the UK’s inflation fight is not yet over.
Financial markets reacted quickly. Traders have now ruled out a February interest-rate cut, with expectations shifting toward rates remaining at 3.75% until at least June.
The Bigger Story: Britain’s G7 Problem
On its own, 3.4% inflation is not historically alarming. By long-term standards, it is relatively modest.
- Inflation peaked at 24.2% in 1975, during the oil crisis.
- It hit 18% in 1980, prompting punishing interest-rate hikes.
- As recently as October 2022, prices were rising at 11.1%, during the cost-of-living crisis.
Today’s figure is a fraction of those extremes.
The problem is context.
As of January 2026, the UK now has the highest inflation rate in the G7, a position it has held for seven consecutive months:
| Country / Region | Inflation Rate | Status |
|---|---|---|
| United Kingdom | 3.4% | G7 Highest |
| Japan | 2.9% | Above Target |
| United States | 2.7% | Steady |
| Canada | 2.4% | Approaching Target |
| Euro Area (Average) | 1.9% | On Target |
| Germany | 1.8% | On Target |
| France | 0.8% | G7 Lowest |
The contrast is stark. While countries like France and Germany have cooled inflation to well below 2%, Britain remains far above the Bank of England’s target, making it the clear outlier among its peers.
Why 3.4% Still Hurts
Inflation at this level acts like a hidden tax, quietly reshaping daily life and economic decisions.
At the kitchen table, food inflation of 4.5% hits lower-income households hardest, as staples make up a larger share of spending. Shrinkflation, smaller products at the same price continues to disguise real increases.
In housing, the impact is more severe. Because inflation has not fallen as hoped, interest rates are staying higher for longer. Around 3.9 million households due to remortgage in 2026 now face the prospect of payments staying hundreds of pounds higher than pre-pandemic levels. Rent increases are also being justified by landlords using inflation as a benchmark.
In wages and savings, the maths is unforgiving. A 3% pay rise against 3.4% inflation is a real-terms pay cut. Savings earning 2% lose value every month inflation remains above returns.
What Comes Next?
Most economists still see the December rise as a speed bump, not a reversal.
The Bank of England has brought forward its forecast for hitting the 2% inflation target to mid-2026, helped by government measures such as energy bill reforms and fare freezes. Inflation is expected to fall toward 2.1% by the end of the year.
Interest rates are likely to ease gradually but the era of ultra-cheap borrowing is over. While economists expect the base rate to settle around 3% in 2027, this new “neutral” level is still vastly higher than the 0.1% emergency-rate era many households remember from just a few years ago.
Mortgage stress should soften rather than explode. Lenders are already cutting fixed-rate deals in anticipation of future rate cuts, though households rolling off ultra-cheap pandemic-era mortgages will still feel a sharp jump.
The Risk on the Horizon
The biggest uncertainty lies abroad. Potential global trade disruptions, including renewed tariff threats from the United States, could push prices down through cheaper imports or slow growth through weaker global demand.
For now, the message is clear: the UK is no longer in crisis mode, but it is not yet in recovery either.
Inflation at 3.4% is not a disaster. But it is a hurdle and one Britain’s peers have already cleared.
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