Uk inflation cooled to 3% in January as petrol, food and airfares declined, lifting hopes of an imminent Bank of England interest rate cut
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Uk headline inflation slows to 3.0% in January
The United Kingdom recorded a slowdown in headline inflation in January, the Office for National Statistics said. The Consumer Prices Index rose by 3.0% compared with the same month a year earlier, down from 3.4% in December.
Lower costs for motor fuels, food and air travel contributed to the decline, placing inflation back on a falling path after a brief uptick the previous month. The figures matched market expectations and eased near-term fiscal pressure on the government as it seeks to reduce the cost of living.
Analysts and central-bank watchers reacted by raising the probability of a reduction in the Bank of England‘s policy rate. Labour-market signals and other economic indicators will continue to influence the timing and scale of any monetary easing.
What moved the inflation rate
Following labour-market signals, changes in fuel costs were a major driver of the slowdown in headline inflation. The Office for National Statistics reported that average petrol prices fell by 3.1p per litre between and January 2026, taking the mean price to 133.2p per litre in January. Diesel prices declined by 3.2p per litre compared with the prior month.
Because fuel represents a sensitive element of the Analysts said similar commodity movements and seasonal factors could continue to shape monthly inflation readings in the near term.
Food, airfares and accommodation
Food and non-alcoholic drink inflation eased from 4.5% in December to 3.6% in January. Prices for bread, cereals and meat were among those pulling the rate lower.
Airfares fell after a December rise and were highlighted by ONS chief economist Grant Fitzner as a downward influence. Offsetting some of that decline, the cost of hotel stays and takeaways rose, leaving accommodation inflation at 1.1% after a small dip the month before. Analysts say the same commodity movements and seasonal effects are likely to continue shaping monthly inflation readings in the near term.
Policy implications and market reaction
Following recent commodity movements and seasonal effects, headline inflation at 3.0% has prompted a reassessment of monetary prospects. Markets and economists have reduced the probability of further tightening by the Bank of England, citing lower inflationary pressure and softer labour-market indicators.
The central bank’s official bank rate remains at 3.75%. Many market participants now regard a rate cut at the next policy meeting as the more likely outcome. The consensus view is that sustained downward momentum in consumer prices weakens the case for additional restrictive measures.
Investors have responded by pricing in lower short-term interest rates and by adjusting gilts and sterling positions. Policymakers face a trade-off between supporting growth and guarding against a rebound in inflation should energy or food prices reverse course. Market attention will focus on forthcoming labour and price data for signals on the pace and timing of any policy shift.
Economists’ views
Market attention will remain on forthcoming labour and price data for signals on the pace and timing of any policy shift. Two leading forecasters said the January fall strongly increases the likelihood of an early rate cut.
Thomas Pugh, chief economist at RSM UK, said the January drop “all but nails on a rate cut next month.” He added the decline could mark the start of a sharper slide toward the 2% target, possibly by April, which would clear the path for a further reduction in summer.
Rob Wood, chief UK economist at Pantheon Macroeconomics, described a March cut as “highly likely” given the latest inflation figures and recent rises in unemployment. Both economists said incoming data will determine how quickly policymakers move.
Broader economic context
Both economists said incoming data will determine how quickly policymakers move. Official statistics released by the Office for National Statistics paint a mixed picture of the UK economy.
The ONS reported that real gross domestic product (GDP) rose by 0.1% in Quarter 4 (Oct to Dec) 2026. The monthly GDP estimate for December showed similarly limited growth. Production output increased, construction contracted and services were broadly flat. Those mixed signals will force policymakers to balance progress on inflation against growth and labour-market conditions.
Labour-market releases pointed to weaker hiring momentum. The unemployment rate rose to a five-year high of 5.2%, with young people particularly affected. The deterioration in the jobs picture has intensified calls for the Bank to consider easing policy as inflation continues to fall.
Producer prices and input costs
Following the deterioration in the jobs picture, official data showed that factory gate prices rose by 2.5% in the year to January, down from a revised rise of 3.1% in the year to December. Input prices fell slightly on an annual basis, easing from a small rise the month before.
Analysts said the pattern points to some pass-through of lower input inflation to consumer prices and could support continued headline disinflation if sustained. Policymakers will watch whether the trend firms in coming releases.
Political reaction was divided. Chancellor Rachel Reeves described the reading as validation of government measures to reduce living costs, citing targeted policies such as energy bill support and a rail fare freeze. The shadow chancellor, Mel Stride, said inflation remained above target and criticised the fiscal approach.
Price fall reshapes Bank of England outlook
After the shadow chancellor’s comments, official figures showing a drop in headline inflation have altered market expectations for monetary easing. The consumer price index fell to 3.0%, a shift that has prompted investors and policymakers to reassess timing.
Lower costs for petrol, food and air travel accounted for much of the decline. At the same time, recent GDP and labour indicators have presented a mixed picture. That combination leaves the policy outlook contingent on whether the price downtrend proves durable.
The next decision by the Bank of England will therefore depend on incoming growth and employment data. Policymakers will monitor those figures closely before altering policy settings.
