The UK economy received a significant boost this morning as official data from the Office for National Statistics (ONS) revealed that annual inflation fell to 3.0% in January 2026. This drop from 3.4% in December marks the lowest level since March last year and indicates that the temporary "bump" in price pressures seen at the end of 2025 has largely subsided. The cooling of prices was broader than many analysts expected, bringing the headline rate significantly closer to the Bank of England’s 2% target.
The primary drivers behind this downward trend were a sharp decline in motor fuel costs and a seasonal reduction in airfares. Petrol prices fell by an average of 3.1p per litre in January, a stark contrast to the price hikes seen during the same period last year. Additionally, food and non-alcoholic beverage inflation slowed to a nine-month low of 3.6%, providing much-needed relief to households struggling with the cost of living. While hotel stays and takeaways saw slight price increases, they were not enough to offset the overall cooling across the transport and retail sectors.
Financial markets have reacted swiftly to the news, with traders now pricing in an 80% chance of an interest rate cut at the Bank of England’s next meeting on March 19. Economists suggest that the combination of falling inflation and yesterday’s data showing unemployment hitting a five-year high of 5.2% creates a "perfect storm" for the Monetary Policy Committee (MPC) to loosen its grip. Many now expect the base rate to be lowered from its current 3.75% to 3.5%, marking the start of a more aggressive easing cycle throughout 2026.
Chancellor Rachel Reeves welcomed the figures, attributing the progress to the government’s strategic choices in the recent budget, including freezes on rail fares and energy bill support. However, some members of the Bank of England remain cautious, noting that "services inflation"—which covers hospitality and entertainment—remains slightly "sticky" at 4.4%. Despite these lingering concerns, the general consensus among City experts is that the UK is firmly back on the path toward price stability, with inflation projected to hit the 2% target as early as April.