UK Inflation Falls to 3.0%, Boosting Hopes for Bank of England Rate Cut
Inflation in the United Kingdom has dropped to its lowest point in nearly a year, according to recent data, further fuelling optimism that the Bank of England will reduce interest rates in March. The headline rate decreased to 3.0 per cent in January, as reported by the Office for National Statistics (ONS), down from 3.4 per cent the previous month.
This decline met City predictions and brought inflation to its lowest level since the previous March. Grant Fitzner, chief economist at the ONS, stated the drop was "partly" due to a reduction in petrol prices, which fell 3.1 per cent month-on-month.
Key Drivers Behind the Inflation Drop
Fitzner elaborated on other factors contributing to the decline: "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."
Services inflation, which is closely watched by policymakers at the Bank of England as a reliable indicator of domestic price pressures, eased to 4.4 per cent from 4.5 per cent previously. This was slightly stronger than many anticipated, and may cause the Bank to reconsider before cutting in March.
Labour Market Data Supports Rate Cut Case
However, most analysts suggested the case for a cut remained strong given yesterday's labour market data. The data revealed that unemployment climbed to a post-pandemic peak at the end of last year whilst wage pressures significantly relaxed, which should help drive down inflation over the medium term.
Luke Bartholomew, deputy chief economist at Aberdeen, commented: "With the labour market data yesterday pointing to ongoing weakness in employment and a further softening in pay growth, most policymakers are likely to look through any short run stickiness in the services data."
Outlook for 2026 and Government Response
The Bank of England anticipates that inflation will return to the two per cent target this spring, primarily due to reduced energy costs, which could clear the path for additional rate reductions in 2026. Jonathan Raymond, investment manager at Quilter Cheviot, said: "As the economy barely kept afloat towards the end of last year, and the labour market and wage growth have cooled considerably, the Bank will likely feel increasingly comfortable cutting rates as 2026 progresses."
Chancellor of the Exchequer, Rachel Reeves, responded to the news: "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."
