Inflation drops to 3% in January as cost pressures ease

UK inflation fell sharply to 3% in January, its lowest level in 10 months, strengthening expectations that the Bank of England could begin cutting interest rates as early as March.

Figures published yesterday by the Office for National Statistics (ONS) show the Consumer Prices Index (CPI) dropped from 3.4% in December to 3.0% in January, with falling food, fuel and air fares the main drivers behind the decline. It marks the lowest annual inflation rate since March last year and signals further easing of price pressures across the economy.

The broader inflation measure, CPIH – which includes owner occupiers’ housing costs – also fell, from 3.6% to 3.2% over the same period. On a monthly basis, CPI fell by 0.5%, reflecting seasonal price drops after the Christmas period.

ONS chief economist Grant Fitzner said inflation “fell markedly” in January, helped by lower petrol prices and a sharp drop in air fares following December’s seasonal increase.

“Airfares were another downward driver this month, with prices dropping back following the increase in December,” he said.

Lower prices for bread, cereals and meat also contributed to the easing in inflation. However, Fitzner noted that some of these falls were partially offset by rising costs for hotel stays and takeaways, highlighting continued pressure in parts of the services sector.

Transport, and food and non-alcoholic beverages, made the largest downward contributions to the monthly change in both CPI and CPIH. Core inflation – which strips out volatile items such as energy and food – also edged lower, suggesting underlying price pressures are gradually cooling.

The latest inflation data follows recent figures showing a slowdown in wage growth, further strengthening the case for a cut to interest rates. The Bank of England’s base rate currently stands at 3.75%, and economists say policymakers now have greater confidence that inflation is moving sustainably towards the 2% target.

Neil Rudge, Chief Banking Officer for Commercial at Shawbrook, said inflation’s retreat towards 3% marked a potential turning point for UK businesses.

“For SMEs, this isn’t simply a positive headline – it marks a potential turning point from short term cost management back towards structured growth planning,” he said. Greater price stability gives leadership teams the confidence to plan further ahead, revisit deferred investment decisions and model expansion with a clearer view of future costs.”

However, Rudge cautioned that many firms remain cautious, waiting for both sustained inflation stability and tangible reductions in borrowing costs before committing to major investments.

Mike Randall, CEO at Simply Asset Finance, noted: “A fall in inflation – now at its lowest in almost a year – will be a welcome signal for UK businesses that have been operating under cost pressure for the past two years.

“While inflation remains above the Bank of England’s 2% target, it’s a clear step in the right direction and should provide greater stability for SMEs planning for growth in 2026.

“As the year begins with a more favourable economic environment, there’s a stronger backdrop for businesses to invest in productivity, expand, and take advantage of improved

“But with political uncertainty still ongoing, we can’t afford to lose momentum. Businesses now need clarity and a consistent pro-growth approach that gives them the confidence to invest for the long term.”

George Lagarias, Chief Economist at Forvis Mazars, was more forthright in his assessment, saying the economic backdrop offered little reason for inflation to remain elevated.

“An economy of sluggish growth, climbing unemployment and softer wage growth has absolutely zero reason to be consistently inflationary,” he said. “The Bank of England still waited for proof and now it has it. We would expect to see faster rate cuts going forward from this point on.”

Despite the fall in inflation, economists and the ONS stressed that prices are not falling overall. Instead, they are rising at a slower pace. For households still struggling with high living costs, the easing in inflation will not immediately translate into cheaper bills at the checkout.

With price pressures easing, wage growth slowing and energy bills set to fall, markets are increasingly betting that the Bank of England will begin loosening monetary policy in the spring – potentially marking the start of a new phase for the UK economy after two years of stubbornly high inflation.