UK Inflation Drops to 3% in January, Fueling Interest Rate Cut Hopes

UK inflation, measured by the Consumer Prices Index (CPI), fell to 3.0% in the year to January, down from 3.4% in December, reaching its lowest level since March 2025. This development reinforces expectations that the Bank of England (BoE) may cut interest rates as soon as March.

Key points

• The fall was driven by lower prices for motor fuels, food (especially bread & cereals and meat), and airfares.
• Core inflation, excluding volatile items like energy and food, decreased to 3.1% from 3.2% in December.
• The BoE's target for inflation is 2%; analysts expect this target to be reached around April.
• Chancellor Rachel Reeves cited budget choices, including £150 off energy bills and a rail fare freeze, as bringing inflation down.
• Conservative shadow chancellor Sir Mel Stride blamed Labour's economic mismanagement for inflation remaining above target and noted rising unemployment.

Why it matters

The significant drop in the annual inflation rate, which aligns with economist forecasts, increases the likelihood of the Bank of England cutting its benchmark interest rate from 3.75% at its next meeting.

Confidence: 100