By bizn_fun 
UK inflation falls to lowest since March 2025
Newflash: Britain’s inflation rate has dropped to its lowest level in almost a year.
The Consumer Price Index, which measures prices changes across the economy, has dropped to 3.0% in January, the Office for National Statistics reports, in line with City forecasts.
That’s down from 3.4% in December, and the lowest rate of annual inflation since March 2025.
Key events
Bank of England rate cut now seen as more likely
The chances of an interest rate cut next month have risen this morning, following the news that UK inflation fell to 3% in January.
The money markets are now indicating that a quarter-point rate cut is now an 81.5% chance, up from 77% last night – and around 65% last week.
The Bank of England’s monetary policy committee voted narrowly to leave rates on hold earlier this month, in a 5-4 split, so it only takes one ‘hold’ voter to change their mind.
Scott Gardner, investment strategist at JP Morgan Personal Investing says”:
“Inflation fell sharply in January, providing some relief to UK consumers at the start of the year. Prices are clearly moving in the right direction, with closely watched core and services inflation continuing their downward trend from previous months.
“Behind the headline figure, motorists were helped as petrol pump prices continued to decline in January to their lowest level since summer 2021. Food inflation also fell after the Christmas period but is still a key area to watch in 2026 as it accounts for a large part of the UK’s everyday spending. Industry barometers suggest that weekly supermarket shops are still elevated with fresh produce prices rising over the month.
“In theory, this fall in inflation could signal a rate cut from the Bank of England at its March meeting barring any surprises between now and then. The progress made on the inflation front over recent months and clear cooling in the jobs market could encourage policymakers to cut interest rates for a seventh quarter in a row. With that said, the Bank of England will remain vigilant as services inflation remains elevated.
UK factory gate inflation slows as input costs drop
In another encouraging sign, the costs paid by UK factories fell last month.
The Office for National Statistics reports that producer input prices fell by 0.2% in the year to January 2026, down from 0.5% in the year to December 2025.
That was mainly due to cheaper crude oil, where prices fell 23.8% over the past year.
With input costs falling, factories felt less pressure to raise their own prices in response.
Producer output prices (also known as prices at the ‘factory gate’) rose by 2.5% in the year to January 2026, down from 3.1% in the year to December 2025.
ONS chief economist Grant Fitzner says:
“The cost of raw materials for businesses fell over the past year, driven by lower crude oil prices, while the increase in the cost of goods leaving factories slowed.”
How petrol and air fares pushed down inflation
A drop in transport costs helped to push UK inflation down in January.
The ONS reports that prices in the transport division rose by 2.7% in the 12 months to January 2026, down from 4.0% in the 12 months to December.
The largest downward effect came from motor fuels, where the average price of petrol fell by 3.1p per litre between December 2025 and January 2026. That pushed the average price of petrol down to 133.2p per litre in January 2026, down from 137.1p per litre a year earlier.
The second-largest downward effect came from air fares, which tend to rise into December and fall into January, as this chart shows:
The ONS explains:
Whereas the pattern of air fares rising into December and falling into January was less pronounced last year, the index this year followed a more conventional pattern, perhaps because the return flights in December did not fall on Christmas Eve and New Year’s Eve.
The more pronounced rise into December 2025 and fall into January 2026 led to a large upward contribution to the change in the annual rate in December 2025 and a large downward contribution in January 2026.
ONS: Decrease in petrol prices pushed inflation down
Here’s ONS chief economist Grant Fitzner on this morning’s drop in UK inflation:
“Inflation fell markedly in January to its lowest annual rate since March last year, driven partly by a decrease in petrol prices.
“Airfares were another downward driver this month with prices dropping back following the increase in December. Lower food prices also helped push the rate down, particularly for bread & cereals and meat. These were partially offset by the cost of hotel stays and takeaways.
Chart: CPI annual inflation rate lowest since March 2025
On a monthly basis, prices fell by 0.5% in January, the ONS reports.
Transport, and food and non-alcoholic beverages made the largest downward contributions to this monthly change.
UK inflation falls to lowest since March 2025
Newflash: Britain’s inflation rate has dropped to its lowest level in almost a year.
The Consumer Price Index, which measures prices changes across the economy, has dropped to 3.0% in January, the Office for National Statistics reports, in line with City forecasts.
That’s down from 3.4% in December, and the lowest rate of annual inflation since March 2025.
A chunky drop in inflation could pave the way for the Bank of England to cut interest rates next month.
A March rate cut is currently seen as a 77% chance by the money markets, after UK unemployment rose yesterday.
Grant Slade, economist at investment research firm Morningstar, is also forecasting a drop in inflation to 3%:
“We expect tomorrow’s CPI data release to further evidence that price growth in the UK is decelerating. We forecast annual CPI inflation of 3.0% in January 2026, down 0.4 percentage points relative to its prior reading in December.
A modest output gap is forming in the UK, with economic growth slowing in the fourth quarter of last year.
Introduction: UK inflation report in focus
Good morning. We’re about to learn if the UK’s cost 0f living squeeze eased last month.
Inflation data for January is due to be released at 7am, and City economists predict a slowdown in the pace of price rises.
The consumer price index (CPI) is forecast to have dropped to 3% in January, down from 3.4% the previous month, and back towards the Bank of England’s 2% target.
If CPI inflation does fall to 3%, that would be the lowest level since March 2025.
A drop in inflation would be welcome, after the CPI rate rose in December for the first time in five months.
But, a drop in inflation doesn’t mean prices are actually falling, just that they’re rising at a slower rate, compared with a year ago.
Victoria Scholar, head of investment at interactive investor, says,
The sluggish economic backdrop and a cooling labour market (especially wage growth), several measures announced in the Budget and base effects from last April when there was a bump in inflation due to energy prices are all contributing to an easing inflationary picture.
Although month-to-month inflation can be bumpy, these factors are expected to allow inflation to return to the Bank of England’s 2% target by Q2 2026 and probably remain around that level.
Investec Economics economist Ellie Henderson has predicted that food price growth is also likely to have dropped to 4.2%, but warned there was a risk that food inflation was still a “key concern”.
The agenda
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7am GMT: UK inflation report for January
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9.30am GMT: UK house prices and rents data for December
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1.30pm GMT: US housing starts and building permits data
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1.30pm GMT: US durable goods orders