UK inflation has fallen to 3%, its lowest level since March last year, increasing expectations that the Bank of England could begin cutting interest rates as soon as next month.
Figures released by the Office for National Statistics (ONS) show the Consumer Prices Index (CPI) dropped from 3.4% in December to 3% in January. The decline was driven by lower petrol prices, easing food costs and a reduction in airfares.
The reading was in line with analysts’ forecasts and marks a return to a downward trend after inflation ticked higher at the end of last year. Economists now believe price growth is on course to fall back to the Bank of England’s 2% target by April if current trends continue.
The latest figures will provide some relief for Chancellor Rachel Reeves as the government seeks to steady the economy and ease pressure on household finances. Inflation has weighed heavily on consumers over the past two years, squeezing disposable incomes and dampening economic growth.
Attention now turns to the Bank of England, which has held interest rates at 3.75% in an effort to tame inflation. Financial markets are increasingly pricing in the possibility of a rate cut at the Bank’s next meeting, with some economists predicting further reductions later in the year if inflation continues to moderate.
A cut in interest rates would reduce borrowing costs for households and businesses, potentially offering support to mortgage holders and firms facing higher financing expenses. However, policymakers are expected to proceed cautiously to avoid reigniting price pressures.
For now, the fall in inflation offers a positive signal that the cost-of-living squeeze may be easing — and that interest rate relief could be on the horizon.
Thomas Pugh, chief economist at RSM UK said: “The sharp drop in inflation in January all but nails on a rate cut next month following yesterday’s weak labour market data.
“What’s more, today’s drop was just the start of a steep slide that should take inflation to 2% in April, which will set the stage for another interest rate cut in the summer.”
ONS chief economist Grant Fitzner said: “Airfares 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 & cereals and meat.
“These were partially offset by the cost of hotel stays and takeaways.”
The Chancellor Rachel Reeves said: ”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.”
Shadow chancellor Mel Stride said: “Inflation remains above target thanks to Labour’s choices.
“Families are still feeling the pinch because of Labour’s economic mismanagement.”
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