UK inflation fell sharply in January to 3 per cent, the lowest level in nearly a year, delivering a further boost to hopes for an interest rate cut as soon as next month after unemployment hit a five-year high.
Inflation dropped from 3.4 per cent in December, according to figures published by the Office for National Statistics (ONS) on Wednesday. January’s decline was in line with analysts’ expectations and took inflation down to the lowest level since March 2025.
Inflation was driven downwards by airfares, petrol and food prices, while the rising cost of hotels and takeaways put upwards pressure on price growth.
The drop in price growth comes after the ONS released figures this week that showed unemployment reached a five-year high of 5.2 per cent at the end of last year, while youth joblessness hit its highest for more than a decade.
Lower inflation, sluggish economic growth and the rise in unemployment have raised expectations in financial markets that the Bank of England will lower interest rates to 3.5 per cent from 3.75 per cent at its next meeting on March 19. Interest rates were lowered four times in 2025.
Grant Fitzner, chief economist at the ONS, said: “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 and cereals and meat. These were partially offset by the cost of hotel stays and takeaways.”
In response to the inflation figures, Rachel Reeves, the chancellor, said that “cutting the cost of living is my number one priority”. Measures set out in her November budget, most notably removing some green levies from consumer energy bills and the first freeze in rail fares for 30 years, are expected to bring inflation back to the 2 per cent target in the spring.
At its meeting last month, the nine members of the Bank of England’s monetary policy committee voted 5-4 in favour of keeping rates unchanged, but the governor, Andrew, Bailey signalled that there was room for rate reductions this year should inflation fall in line with expectations.
Yael Selfin, chief economist at KPMG UK, said that the steep drop in inflation “paves the path for a March interest rate cut”, adding that there could be three rate reductions this year.
Food inflation dropped to 3.6 per cent year-on-year in January, its lowest level since last April and down from 4.5 per cent in the previous month. Services inflation — which is closely watched by the Bank of England — inched down to 4.4 per cent from 4.5 per cent, while core inflation fell to 3.1 per cent from 3.2 per cent.
The pound dropped by 0.06 per cent against the dollar to $1.35, and the yield on the benchmark ten-year UK government bond fell by 0.02 percentage points to 4.38 per cent, the lowest level in about a month.