UK inflation registered a significant fall to 3 per cent in January, presenting a rare positive development for Chancellor Rachel Reeves. This marks a notable decrease from the 3.4 per cent recorded in December and represents the lowest inflation rate since March. The Office for National Statistics (ONS) confirmed this decline, which has significantly bolstered expectations for another interest rate cut by the Bank of England, potentially as early as next month.

Several factors contributed to this welcome slowdown in the Consumer Prices Index (CPI) inflation. Motor fuels played a crucial role, with the average price of petrol falling by 3.1p per litre between December 2025 and January 2026, settling at 133.2p per litre. Diesel prices also saw a decline of 3.2p per litre compared to the previous month, reaching 142.5p per litre. This reduction in fuel costs was a major downward driver. Additionally, the increase in prices for food and non-alcoholic drinks slowed sharply, falling from 4.5 per cent in December to 3.6 per cent in January, achieving a nine-month low. Specific categories like bread and cereals, and meat, saw reduced prices. Airfares also contributed to the overall fall, dropping back following an increase in December. The cost of raw materials for businesses declined over the past year, influenced by lower crude oil prices, and the rate of increase in goods leaving factories also slowed.

However, some areas experienced upward pressure, partially offsetting the broader easing. Accommodation inflation, specifically hotel prices, rose to 1.1 per cent in January after a slight dip of 0.1 per cent in December. Services inflation, which measures consumer-facing services such as hospitality and entertainment, only showed a marginal slowdown, from 4.5 per cent in December to 4.4 per cent in January, remaining above the Bank of England's forecast of 4.1 per cent. Core inflation, which excludes volatile elements like energy, food, and alcohol, also slowed but only slightly, from 3.2 per cent to 3.1 per cent, reaching its lowest level since 2021. Price increases in alcohol and tobacco also slowed from 5.2 per cent in December to 4.6 per cent in January.

The broader economic context further supports the likelihood of an interest rate reduction. Disappointing growth figures for the final quarter of last year revealed that the economy expanded by only 0.1 per cent in the three months to the end of December. Furthermore, unemployment has risen to a five-year high of 5.2 per cent, with youth unemployment noted as being above the European average, and GDP per capita falling. Private sector earnings grew by 3.4 per cent over the year to December, a decrease from 3.6 per cent in November. These indicators of slowing economic activity, combined with easing inflation, put pressure on policymakers to cut rates from their current level of 3.75 per cent, with some economists forecasting a drop to 3.5 per cent.

Economists widely anticipate that the latest inflation figures pave the way for a rate cut as early as next month, with March or April being strong possibilities. Thomas Pugh, chief economist at RSM UK, stated that the sharp drop