UK inflation eased to 3% in January, down from 3.4% in December, strengthening expectations that the Bank of England could begin cutting interest rates as soon as March. The latest figures suggest price pressures are continuing to cool after a brief rebound at the end of 2025.
This marks the lowest annual inflation rate since March last year, when prices were rising at 2.6%. Inflation has been slowly moving closer to the government’s 2% target, reversing the short-lived surge seen during the winter months.
Although inflation has fallen, everyday costs are still increasing. The difference is that prices are now rising more slowly rather than dropping outright. This signals a gradual easing of pressure on household budgets rather than a full return to cheaper living costs.
The rise recorded in December had largely been driven by seasonal effects, including higher flight prices over the Christmas period and an increase in tobacco duty announced in the autumn Budget.
According to Grant Fitzner, chief economist at the Office for National Statistics, the January fall was partly the result of lower petrol prices. He also noted that airfares declined after their festive surge, helping pull the overall inflation figure down.
Food prices also contributed to the slowdown, particularly for staple items such as bread, cereals and meat. However, these reductions were partly offset by higher costs for hotel accommodation and takeaway food.
The cost of raw materials for businesses has also dropped over the past year, largely due to lower crude oil prices. At the same time, the pace at which factory gate prices are rising has slowed, reducing pressure further along the supply chain.
Earlier this month, the Bank of England chose to keep its main interest rate at 3.75%. However, the decision revealed growing disagreement among policymakers. Some members of the Monetary Policy Committee argued for an immediate cut, pointing to weakening consumer demand and signs that the labour market is beginning to cool.
Core inflation, which excludes volatile food and energy prices, fell to 3.1% in January from 3.2% in December. Services inflation, which the Bank closely monitors when setting interest rates, also edged down to 4.4% from 4.5% the previous month.
Chancellor Rachel Reeves said reducing the cost of living remains her top priority. She highlighted government measures such as £150 reductions in energy bills, the first rail fare freeze in 30 years and another freeze on prescription charges as steps helping to bring inflation down.
Transport and food costs were among the main drivers behind the latest fall, the ONS reported. Prices in the transport category rose by 2.7% over the year to January, compared with 4% in the previous 12 months. This slowdown was partly linked to falling airfares after the holiday season.
The new data adds to evidence that inflation is steadily returning towards the 2% target following a volatile period at the end of last year.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said January’s drop signals a sharp downward trend. He pointed to falling food prices and lower energy bills, supported by cuts to green levies and an expected reduction in the energy price cap in April, which could bring inflation close to 2% by spring.
On a month-to-month basis, prices actually fell by 0.5% in January, according to the ONS, offering some immediate relief to consumers.
Scott Gardner, investment strategist at JPMorgan Personal Investing, said the decline in inflation provides a welcome boost at the start of the year. He added that both core and services inflation are clearly trending downward, increasing the chances of an interest rate cut in March if no unexpected shocks occur.
However, the Bank of England is likely to remain cautious. Services inflation is still relatively high, and policymakers will want to ensure that price stability is firmly under control before moving too quickly.
Alice Haine, personal finance expert at Bestinvest, said easing inflation is encouraging news for households. She explained that slowing price growth helps protect spending power, especially for lower-income families who spend more of their income on essentials. Nevertheless, prices are still rising, and many households continue to struggle, particularly with higher taxes and living costs.
She added that a return to interest rate cuts later this spring could provide much-needed relief for families facing high mortgage payments and debt. Lower inflation also raises the possibility of further mortgage rate reductions, which could benefit both homeowners and first-time buyers.
With inflation moving in the right direction and signs of a cooling jobs market, confidence may slowly return to the economy. While challenges remain, the latest figures suggest the worst of the cost-of-living crisis may be behind the UK, offering cautious optimism for the months ahead.
Download NOW
4 Simple Steps To Becoming Wealthy Through Property