UK inflation slowed more sharply than expected in January, falling to 3 per cent and boosting expectations that the Bank of England could reduce interest rates as early as next month.
Data from the Office for National Statistics (ONS) showed that consumer price index (CPI) inflation eased from 3.4 per cent in December to 3 per cent in January, marking the lowest annual rate since March 2025. Analysts had predicted a moderate decline, but the fall was in line with forecasts.
The slowdown was driven by lower airfares, falling petrol prices, and easing food costs. Food inflation fell to 3.6 per cent year-on-year from 4.5 per cent in December, its lowest level since April 2025. Services inflation edged down to 4.4 per cent, while core inflation, which excludes volatile items such as energy and food, decreased to 3.1 per cent. Higher prices for hotel stays and takeaway meals offset some of the broader easing.
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 comes as the labour market shows signs of weakness. Recent figures revealed unemployment had risen to 5.2 per cent, the highest level in five years, while youth joblessness reached a decade high. The combination of slower inflation, rising unemployment, and sluggish economic growth has heightened market expectations that the Bank of England will cut rates at its 19 March policy meeting. Financial markets now price in a strong likelihood of a reduction from 3.75 per cent to 3.5 per cent. The Bank lowered rates four times in 2025.
Chancellor Rachel Reeves said cutting the cost of living remained her “number one priority.” She highlighted measures introduced in the November budget, including energy bill adjustments and the first rail fare freeze in 30 years, as helping ease household financial pressures.
At its most recent meeting, the Bank’s monetary policy committee voted narrowly, 5-4, to hold rates steady. Governor Andrew Bailey indicated that there was room for further easing this year if inflation continued to moderate.
Yael Selfin, chief economist at KPMG UK, said the latest data “pave the path for a March rate cut” and suggested that there could be up to three reductions in interest rates over the course of 2026.
Markets reacted modestly to the report. Sterling fell 0.06 per cent against the dollar to $1.35, while the yield on the ten-year UK government bond dropped to 4.38 per cent, its lowest level in about a month.
With inflation edging closer to the Bank’s 2 per cent target and economic momentum slowing, all eyes will now be on whether policymakers view the cooling trend as sustained enough to justify renewed monetary easing.
