UK inflation slowed more sharply than many had feared in January, falling to 3 per cent and bolstering expectations that the Bank of England could resume cutting interest rates as early as next month.
Data from the Office for National Statistics showed consumer price index (CPI) inflation eased from 3.4 per cent in December to 3 per cent in January, the lowest annual rate since March 2025. The reading was in line with analysts’ forecasts.
The decline was driven by lower airfares, falling petrol prices and easing food costs. Food inflation slowed to 3.6 per cent year-on-year, down from 4.5 per cent in December and its lowest level since last April. Services inflation edged down to 4.4 per cent from 4.5 per cent, while core inflation, which strips out volatile elements such as energy and food, fell to 3.1 per cent.
However, higher prices for hotel stays and takeaway food partly offset the broader slowdown.
Grant Fitzner, chief economist at the ONS, said: “Inflation fell markedly in January, driven in part by a drop in petrol prices and airfares following December’s increases. Lower food prices also contributed, particularly for bread, cereals and meat.”
The easing in price pressures comes amid signs of weakness in the labour market. Earlier this week, figures showed unemployment had climbed to 5.2 per cent, its highest level in five years, while youth joblessness reached a decade high.
Taken together, softer inflation, rising unemployment and sluggish growth have increased market expectations of a rate cut when policymakers meet on 19 March. Financial markets are now pricing in a strong likelihood that rates will be reduced from 3.75 per cent to 3.5 per cent. The Bank lowered rates four times in 2025.
Rachel Reeves said cutting the cost of living remained her “number one priority”, pointing to measures in the November budget such as energy bill adjustments and the first rail fare freeze in 30 years as helping to ease pressure on households.
At its most recent meeting, the Bank’s monetary policy committee voted narrowly, by 5-4, to hold rates steady. Governor Andrew Bailey indicated there was scope for further easing this year if inflation continued to moderate.
Yael Selfin, chief economist at KPMG UK, said the latest figures “pave the path for a March rate cut” and suggested there could be up to three reductions over the course of 2026.
Markets reacted modestly. Sterling dipped 0.06 per cent against the dollar to $1.35, while the yield on the ten-year UK government bond fell to 4.38 per cent, its lowest level in around a month.
With inflation edging closer to the Bank’s 2 per cent target and economic momentum slowing, attention will now turn to whether policymakers judge the cooling trend sufficiently durable to justify renewed monetary easing.