UK inflation eased to 3.0% in January, its lowest level in nearly a year, strengthening expectations of a March rate cut by the Bank of England even as services inflation remains sticky
Britain’s inflation rate fell to its lowest level in nearly a year in January, reinforcing expectations that the Bank of England could move closer to cutting interest rates as early as March, even as sticky services prices signal lingering domestic pressures.
Data released by the Office for National Statistics (ONS) on Wednesday showed consumer prices rose 3 per cent year-on-year in January, down from 3.4 per cent in December. The reading matched the median forecast in a Reuters poll of economists and marked the lowest level since March last year.
The moderation was driven by slower increases in transport, food and non-alcoholic drink prices. Airline fares, which had surged in December, declined sharply on the month, contributing to the easing in headline inflation.
The latest print strengthens the narrative that price pressures are gradually aligning with the central bank’s trajectory. Earlier this month, the Bank of England projected inflation would ease to 2.9 per cent before falling closer to its 2 per cent target in April as last year’s rises in utility bills and regulated tariffs drop out of the annual comparison.
Core inflation softens, but services remain sticky
Core inflation—which strips out volatile components such as energy, food and tobacco—slowed to 3.1 per cent in January, its weakest pace since September 2021. The decline will offer some reassurance to policymakers wary of entrenched price dynamics.
Food price growth, closely watched by the central bank for its impact on public inflation expectations, cooled to its slowest pace since April 2025.
However, underlying pressures remain evident. Services inflation—a key gauge of domestic cost dynamics, particularly wage-linked price increases—edged down only marginally to 4.4 per cent from 4.5 per cent in December. The figure was slightly above economists’ expectations of a 4.3 per cent reading.
Economists cautioned that while the disinflation trend is intact, the persistence in services prices could keep policymakers cautious. Survey-based measures of pricing power have also suggested that the pace of disinflation may be slowing.
Markets price in March rate cut
Sterling was little changed against the US dollar following the release, suggesting markets had largely priced in the outcome. Interest rate futures indicate an almost 80 per cent probability of a quarter-point rate cut in March, with further easing expected later in 2026.
Investors anticipate the central bank’s benchmark rate could be lowered to 3.5 per cent in March, after policymakers voted narrowly to keep borrowing costs unchanged in February.
The easing in inflation comes against a softening economic backdrop. Recent ONS data showed Britain’s economy barely expanded at the end of 2025, while labour market figures released earlier this week pointed to continued job losses, albeit with tentative signs of stabilisation.
Britain’s inflation rate, while moderating, remains higher than that of the United States and the euro zone, where January readings stood at 2.4 per cent and 1.7 per cent respectively. That divergence has complicated the policy calculus for the Bank of England, which has had to balance weak growth against persistent domestic price pressures.
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