U.K. inflation slowed more than many feared in January, falling to 3 percent and bolstering expectations that the Bank of England could cut interest rates again as soon as next month.
Data from the Office for National Statistics showed consumer price index (CPI) inflation fell to 3 percent in January from 3.4 percent in December, the lowest annual rate since March 2025. The reading was in line with analysts’ forecasts.
The decline was due to lower airfares, falling gasoline prices and falling food prices. Food inflation slowed to 3.6 percent year-on-year, down from 4.5 percent in December and the lowest level since last April. Services inflation fell to 4.4 percent from 4.5 percent, while core inflation, which excludes volatile items such as energy and food, fell to 3.1 percent.
However, higher prices for hotel accommodation and takeaway food partially offset the overall slowdown.
Grant Fitzner, chief economist at the ONS, said: “Inflation fell significantly in January, partly driven by a fall in petrol prices and airfares following increases in December. Lower food prices also contributed, particularly for bread, grains and meat.”
The easing price pressure is accompanied by signs of weakness in the labor market. Earlier this week, figures showed unemployment had risen to 5.2 percent, the highest level in five years, while youth unemployment hit its highest level in a decade.
Overall, weaker inflation, rising unemployment and sluggish growth have increased market expectations for a rate cut when policymakers meet on March 19. The financial markets are now calculating with high probability that interest rates will be reduced from 3.75 percent to 3.5 percent. In 2025, the bank cut interest rates four times.
Rachel Reeves said reducing the cost of living remained her “top priority”, pointing out that measures in the November budget such as adjustments to energy bills and the first rail fare freeze in 30 years would help ease pressure on households.
At its last meeting, the bank’s monetary policy committee narrowly voted 5-4 to maintain interest rates. Gov. Andrew Bailey suggested there was scope for further easing this year if inflation continues to moderate.
Yael Selfin, chief economist at KPMG UK, said the latest figures “pave the way for a rate cut in March” and suggested there could be up to three cuts over the course of 2026.
The markets reacted cautiously. Sterling fell 0.06 percent against the dollar to $1.35, while the yield on Britain’s 10-year government bond fell to 4.38 percent, its lowest level in around a month.
With inflation approaching the Bank’s 2 percent target and economic momentum slowing, attention will now turn to whether policymakers consider the slowdown trend sufficiently sustained to justify renewed monetary easing.
