UK inflation cools to 3% in January, boosting BoE rate cut hopes

UK inflation eased to an annual rate of 3% in January, official data showed on Wednesday, offering fresh evidence that price pressures are gradually subsiding after a prolonged period of elevated inflation.

Figures from the Office for National Statistics showed the consumer price index fell from 3.4% in December, matching expectations in a poll of economists by Reuters.

It marked the lowest annual inflation rate since March 2025.

Core inflation, which strips out energy, food, alcohol and tobacco, also edged lower to 3.1% from 3.2% a month earlier, suggesting underlying price pressures are easing, albeit slowly.

Fuel, food and airfares drive slowdown

The decline was driven in part by falling petrol prices, according to ONS chief economist Grant Fitzner.

Writing on social media, Fitzner said airfares also pulled inflation lower after rising in December, while food prices eased, particularly for bread, cereals and meat.

Those declines were partially offset by higher prices for hotel stays and takeaways, underscoring the continued stickiness of services inflation, which has been a persistent concern for policymakers.

Sterling was little changed following the release, trading flat against the dollar at $1.3562, reflecting that the data came broadly in line with market expectations.

Bank of England watches closely

The latest inflation figures will be closely scrutinised by the Bank of England as it assesses whether inflation is on track to fall back towards its 2% target by April.

The data arrive against a backdrop of weak economic momentum.

UK gross domestic product expanded by just 0.1% in the three months to December, while unemployment climbed to a near five-year high of 5.2%.

Private sector pay growth slowed to 3.4% over the year to December, adding to signs that demand pressures are easing.

Annual wage growth, a key metric for the central bank, cooled further in the final months of 2025, potentially reducing the risk that services inflation remains elevated.

Rate cut expectations firm up

Economists say the combination of cooling inflation, weaker growth and a softening labour market has strengthened the case for interest rate cuts in the coming months.

“Sticky inflation has been the Achilles’ heel for the UK for a number of years, requiring the Bank of England to keep interest rates restrictive,” said Zara Nokes, global market analyst at J.P. Morgan Asset Management in a CNBC report.

“But it appears that we have finally turned a corner.”

Nokes said the January data showed broad-based disinflation across sectors and that headline inflation could fall close to the 2% target by April.

She added that moderating wage growth should help keep services inflation in check, giving the central bank scope to deliver further rate cuts this year.

Based on recent employment data, she said, those cuts could be front-loaded, with the policy rate currently at 3.75%.

Gloomy growth outlook adds pressure

Others echoed that view, pointing to the fragile state of the economy.

Danni Hewson, head of financial analysis at AJ Bell, said weak growth and a lacklustre jobs market have increased the likelihood of a rate cut at the Bank of England’s March meeting.

She added that expectations are also building that interest rates could fall as low as 3% by the end of the year if economic conditions continue to deteriorate.

Despite the improvement in inflation, economists cautioned that UK price growth remains higher than in the United States and the euro zone, where inflation stood at 2.4% and 1.7% respectively in January, highlighting the challenges still facing policymakers.