UK inflation dropped to 3% in January, its lowest level since March 2025, according to the Office for National Statistics (ONS). The figure, which was in line with City economists' forecasts, has strengthened expectations that the Bank of England may cut interest rates as early as next month.
The decline was driven by falls in petrol prices, air fares, and food costs. Petrol and diesel prices fell by 2.2% over the year, while the average price of petrol dropped by 3.1p per litre between December and January to 133.2p. Food and non-alcoholic drink price inflation slowed sharply to 3.6%, down from 4.5% in December, reaching a nine-month low.
Core inflation, which excludes volatile items like energy and food, eased to 3.1% from 3.2% in December, the lowest since 2021. However, services inflation remained sticky at 4.4%, 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.
Chancellor Rachel Reeves welcomed the figures, attributing the decline to government measures including a £150 reduction in energy bills and a freeze on rail fares. The ONS noted that lower crude oil prices reduced raw material costs for businesses, while food price falls were led by bread, cereals, and meat.
