Inflation Expected to Fall Below Two Per Cent By April 2026

Annual CPI inflation fell to 3.0 per cent from 3.4 per cent. January is the most “seasonal” month for inflation, in that prices usually fall (the January sales effect). The change in headline inflation in January is driven by whether the fall in prices this year is larger or smaller than in the previous January. The fall in prices was large this year: prices in January 2026 were 0.5 per cent lower than in December, compared with a more modest decline of 0.1 per cent in January 2025. This difference led to a large fall of 0.4 percentage points in headline inflation.

The fall in inflation in January has lowered the expected path of inflation throughout 2026, with inflation set to fall below 2 per cent in April. This means that the Bank of England now has scope to reduce interest rates, moving down from the current level of 3.75 per cent towards the longer-term norm of around 3.25 per cent.

Services inflation fell to 4.4 per cent from 4.5 per cent, while goods inflation also decreased, from 2.2 per cent to 1.6 per cent. Core inflation (excluding food and energy) dipped from 3.3 per cent to 3.1 per cent. The latest ONS wage data (October–December 2025) show annual wage growth still elevated at 4.2 per cent, although down from 4.6 per cent. Taken together, the data suggest that inflationary pressures remain persistent in services but are abating overall.

The biggest contributors to the change in headline inflation between December and January were:

Transport:                                                           –0.19 percentage pointsFood and non-alcoholic beverages:         –0.11 percentage pointsEducation:                                                          –0.07 percentage points

The chart below shows the sectoral contributions to overall inflation, with the previous year’s monthly inflation dropping out (red) and the current month’s new inflation dropping in (peach). The overall impact is the sum of the two, shown by the black line. Focusing on the new monthly inflation (peach), six sectors registered an increase in prices this month, while five registered a fall. The drop-outs from the previous year are negative in seven sectors, but with large positive effects in Clothing and Footwear, Furniture and Household Equipment, and Services and Restaurants and Hotels. Overall, the black line, showing the total effect for each sector, is mostly negative, with significant positives in just two sectors. This has resulted in the large fall in prices overall in January 2026 relative to January 2025.

Extreme Items

Out of over 700 types of goods and services sampled by the ONS, there is a great diversity in how their prices behave.  Each month some go up, and some go down.  Looking at the extremes, for this month, the top ten items with the highest month-on-month (MoM) inflation are:

Top ten items for MoM inflation (%), January 2026Computer Game 296.04Computer Game 160.61Computer Game 351.94Action Camera43.57Electric Toothbrush40.05Portable Speaker30.77House Contents Insurance30.50Spirits, Liqueur30.44Toothbrush25.09Private Health Care 125.09

Computer games and electrical goods seem to dominate this January. One possibility is that the big sales for these items now happens around “Black Friday” rather than January.

The ten items with the highest negative inflation this month are shown below.

Bottom ten items for MoM inflation (%), January 2026Women’s Blouse/Shirt 1-23.63Book – Fiction – Hard Cover-23.65Airport Parking-23.77Coach Fares-26.32Women’s Short Sleeve Formal Top-26.58Women’s Dress 1-30.23Euro Tunnel Fares-38.95Golf Green Fees-41.45Roadside Recovery Service-44.85Air Fares-46.36

Classic January sales items in terms of women’s clothing and also trave related items with Eurotunnel and airfares being prominent.

In both these tables we look at how much the item price-index for this month has increased since the previous month, expressed as a percentage.  These calculations were made by my former PhD student at Cardiff University, Dr. Yang Li, who is now lecturing at the Guangzhou College of Commerce.

Looking forward through 2026.

We can look ahead over the next 12 months to see how inflation might evolve as the recent inflation “drops out” as we move forward month by month.  Each month, the new inflation enters the annual figure and the old inflation from the same month in the previous year “drops out”.  We depict the following scenarios for future inflation dropping in:

The “low” scenario assumes inflation each month is equivalent to 1 per cent per annum (0.08 per cent per calendar month).The “medium” scenario assumes that the new inflation each month is equivalent to what would give us 2 per cent per annum or 0.17 per cent per calendar month – which is both the Bank of England’s target and the long-run average for the last 25 years.The “high” scenario assumes that the new inflation each month is equivalent to 3 per cent per annum (0.25 per cent per calendar month).The “very high” scenario assumes that the new inflation each month is equivalent to 5 per cent per annum (0.4 per cent per calendar month). This reflects the inflationary experience of the United Kingdom in 1988-1992 (when mean monthly inflation was 0.45 per cent).

We expect inflation to be most likely to fall within the medium to high range. The large January sales effect has lowered the expected path of inflation throughout 2026, such that inflation is set to fall below 3 per cent in February and March, with a large drop in April 2026—when the sharp rise in April 2025 drops out—pushing inflation down to 1.2 per cent or below in the medium scenario, and below 1.4 per cent even in the high scenario. Inflation would then likely remain below 2 per cent in the medium scenario and below 3 per cent in the high scenario for the rest of the year. Possible upward pressures include indirect tax increases in the Budget or energy price rises, but these are unlikely to be as significant as those seen in April 2025. Persistently high wage growth and services inflation may, however, slow the pace of disinflation.

This forecast assumes no major deterioration in geopolitical conditions, as discussed in previous blogs. However, many commentators believe that a war between the US and Iran is highly likely. Such a development would probably disrupt the supply of oil and LNG if the Strait of Hormuz were closed, which would have a strong upward impact on inflation.

The views expressed in this blog are those of the author and can not necessarily be attributed to the National Institute of Economic and Social Research