Britain's inflation slowed to 3 percent in January more quickly than many had expected, raising expectations that the Bank of England could resume interest rate cuts as early as next month.
Data from the Office for National Statistics showed that consumer price index (CPI) inflation slowed 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 caused by falling air fares, falling petrol prices and falling food prices. Food inflation slowed year-on-year to 3.6 percent, down from 4.5 percent in December and its lowest level since last April. Services inflation eased to 4.4 percent from 4.5 percent, while core inflation, which strips out volatile elements like energy and food, fell to 3.1 percent.
However, higher prices for hotel stays and takeout meals partially offset the broader recession.
Grant Fitzner, chief economist at the ONS, said: “Falls in petrol prices and airfares led to a notable decline in inflation in January after rising in December. Lower food prices also contributed, particularly for bread, cereals and meat.”
Pricing pressures eased amid signs of weakness in the labor market. Earlier this week, data showed unemployment rose to 5.2 percent, its highest level in five years, while youth unemployment hit a decade high.
Overall, soft inflation, rising unemployment and sluggish growth have raised market expectations of a rate cut at the policymakers' meeting on March 19. Financial markets are now pricing in a strong possibility that rates will be cut from 3.75 percent to 3.5 percent. The bank reduced rates four times in 2025.
Rachel Reeves said cutting the cost of living remains her “number one priority”, pointing to measures such as energy bill adjustments and the first rail fare freeze in 30 years in the November budget to help ease pressure on households.
At its most recent meeting, the bank's Monetary Policy Committee voted by a narrow 5-4 margin to keep rates steady. Governor Andrew Bailey indicated there was scope for further easing this year if inflation continued to ease.
KPMG UK chief economist Yael Selfin said the latest figures “pave the way for a March rate cut” and suggested there could be up to three cuts during 2026.
The markets reacted cautiously. Sterling fell 0.06 percent against the dollar to $1.35, while the yield on ten-year UK government bonds fell to 4.38 percent, its lowest level in almost a month.
With inflation approaching the bank's 2 percent target and economic momentum slowing, attention will now turn to whether policymakers view the cooling trend as sufficiently sustainable to justify renewed monetary easing.
Amy Ingham
Amy is a newly qualified journalist specializing in business journalism with responsibility for news content at Business Matters, the UK's largest print and online source of current business news.