UK inflation fell to 3% in January, its lowest level since March 2025, boosting expectations that the Bank of England may cut interest rates as early as next month. The figure, in line with most City forecasts, marks a sharp decline from the 3.8% peak seen last year, though it remains above the Bank's 2% target.
The Office for National Statistics attributed the drop to falling petrol prices, lower air fares, and a slowdown in food price inflation. Petrol and diesel prices fell by 2.2% over the year, while food inflation slowed to 3.6% from 4.5% in December, reaching a nine-month low.
Money markets now price an 86% chance of a quarter-point rate cut to 3.5% in March, up from 77% before the data release. Suren Thiru, economics director at ICAEW, said the figures make a spring cut 'look almost assured,' though policymakers may still wait for further evidence of easing inflation.
Core inflation, excluding volatile items, slowed to 3.1%, its lowest since 2021. However, services inflation remained sticky at 4.4%, above the Bank's 4.1% forecast. The economy expanded by just 0.1% in the final quarter of last year, while unemployment rose to a five-year high of 5.2%.
Chancellor Rachel Reeves welcomed the fall, saying it reflects measures taken in the November Budget, including energy bill reductions and rail fare freezes. Yael Selfin of KPMG predicted a further 7% drop in household energy bills from April, driven by lower wholesale gas prices.
