UK inflation dropped to 3% in January, the lowest level since March 2025, according to the Office for National Statistics (ONS). The decline, driven by lower petrol prices, air fares, and food costs, has boosted expectations of an early interest rate cut by the Bank of England.
The ONS reported that food and non-alcoholic drink price inflation slowed sharply to 3.6% in the year to January, down from 4.5% in December, reaching a nine-month low. Petrol and diesel prices fell by 2.2% over the year, with the average price of petrol dropping 3.1p per litre between December and January to 133.2p, and diesel falling 3.2p to 142.5p per litre.
Core inflation, which excludes volatile items like energy and food, slowed to 3.1% in January, the lowest since 2021. However, services inflation remained elevated at 4.4%, above the Bank of England's forecast of 4.1%. Money markets now indicate an 86% chance of a rate cut to 3.5% in March, up from 77% before the data release.
Chancellor Rachel Reeves welcomed the figures, stating: “Cutting the cost of living is my number one priority. Thanks to the choices we made at the budget we are bringing inflation down.” The government's measures, including a £150 reduction in energy bills and a freeze on rail fares, are expected to further lower inflation in April.
Economists predict inflation could return to the Bank of England's 2% target later this year, with KPMG's Yael Selfin noting that household energy bills could decrease by about 7% from April due to the government's energy package and falling wholesale gas prices.
