UK inflation falls to 3%, boosting hopes of early cut in interest rates
UK inflation tumbled to 3% in January, giving a boost to hopes of an early cut in interest rates by the Bank of England,The slowdown was in line with a majority of City economists’ forecasts and marks the lowest level since March 2025,The Office for National Statistics (ONS) said that falls in petrol prices, air fares and food had driven the drop,In a welcome boost for households’ shopping budgets, the rise in prices for food and non-alcoholic drinks slowed sharply to 3,6% in the year to January, down from 4.
5% in December, and reaching a nine-month low,Petrol and diesel prices fell by 2,2% over the year compared with a 0,9% rise last year,The average price of petrol fell by 3.
1p a litre between December and January to stand at 133.2p a litre, while diesel fell by 3.2p to stand at 142.5p a litre.Inflation peaked last year at 3.
8% and most economists expect it to drop back quickly to the Bank’s 2% target this year.The latest figures would allow for a rate cut as early as next month, with Threadneedle Street’s policymakers concerned about the slowing pace of economic growth.Suren Thiru, the 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 among policymakers will be whether to pull the trigger in March or April as some may want slightly more evidence of easing inflation before reducing rates.”Money markets indicated an 86% chance of a rate cut to 3.5% in March, up from 77% before the inflation data was released.
The ONS chief economist, Grant Fitzner, said, along with petrol prices: “Air fares were another downward driver this month with prices dropping back following the increase in December.Lower food prices also helped push the rate down, particularly for bread and cereals and meat.These were partially offset by the cost of hotel stays and takeaways.“The cost of raw materials for businesses fell over the past year, driven by lower crude oil prices, while the increase in the cost of goods leaving factories slowed.”Core inflation, which strips out the more volatile elements such as energy, food and alcohol, slowed to a rate of 3.
1% in the year to January, down from 3,2% in December, and the lowest level since 2021,However, services inflation, which measures consumer-facing services such as hospitality and entertainment, only slowed to 4,4% from 4,5% in December, above the Bank’s forecast of 4.
1%,The inflation figure adds to signs that the Bank may conclude that the economy could benefit from another cut in interest rates from its current level of 3,75%,The country’s economy expanded by only 0,1% in the three months to the end of December, the ONS said last week.
Unemployment also increased to a five-year high of 5,2%, according to official figures covering the same period,Private sector earnings grew by 3,4% over the year to December, down from 3,6% in November.
The chancellor, Rachel Reeves, will be cheered by the inflation figure, having used the budget in November to cut the cost of living, mainly through reductions in energy bills and rail fares.The effects of these measures should lead to a further drop in the consumer prices index in April.Yael Selfin, the chief economist at KPMG, said: “The combined impact of the government’s energy bill package and the fall in wholesale gas prices could see household energy bills decrease by about 7% from April.” She added that food prices were also likely to fall, with recent declines in global food prices being passed on to UK households.Reeves said on Wednesday: “Cutting the cost of living is my number one priority.
Thanks to the choices we made at the budget we are bringing inflation down, with £150 off energy bills, a freeze in rail fares for the first time in 30 years and prescription fees frozen again.“Our economic plan is the right one, to cut the cost of living, cut the national debt, and create the conditions for growth and investment in every part of the country.”
US and Japan unveil $36bn of oil, gas and critical minerals projects in challenge to China
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UK interest rate cut likely in March as unemployment rate rises; youth joblessness to ‘increase significantly’ in coming months – as it happened
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Surging prediction markets face legal backlash in US: ‘Lines have been blurred’
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