UK inflation dropped to 3% in January, its lowest level since March 2025, according to the Office for National Statistics. The decline, driven by falling petrol prices, air fares and food costs, has fuelled expectations that the Bank of England may cut interest rates as early as next month.
The annual inflation rate, down from 3.8% last year, remains above the Bank’s 2% target but is in line with most City economists’ forecasts. Food and non-alcoholic drink inflation slowed sharply to 3.6%, a nine-month low, while petrol prices fell by 2.2% over the year compared with a rise of 0.9% in the previous year.
Core inflation, which excludes volatile items such as energy and food, eased to 3.1% from 3.2%, the lowest since 2021. However, services inflation, a key indicator for policymakers, only edged down to 4.4% from 4.5%, above the Bank’s forecast of 4.1%.
Money markets now price an 86% chance of a rate cut to 3.5% in March, up from 77% before the data release. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: “These figures make a spring interest rate cut look almost assured, though a lingering question… will be whether to pull the trigger in March or April.”
The slowdown adds to signs of a fragile economy, which grew just 0.1% in the final quarter of last year, while unemployment rose to 5.2%, a five-year high. Chancellor Rachel Reeves welcomed the figures, saying: “Cutting the cost of living is my number one priority. Thanks to the choices we made at the budget we are bringing inflation down.” Yael Selfin of KPMG noted that household energy bills could fall by about 7% from April due to government measures and lower wholesale gas prices.
