The rate of inflation in the UK dropped to 3% in the year to January, fuelling speculation that the Bank of England will cut interest rates in March.
The figure was down from 3.4% in the 12 months to December, marking its lowest level since March 2025. However, it remains above the Bank of England’s 2% target.
The slowdown reflects lower airfare and petrol prices, alongside a cooling in food prices following sharp increases at the end of last year.
According to the Office for National Statistics, transport prices rose by 2.7% in the 12 months to January 2026, down from 4% in the 12 months to December. On a monthly basis, prices fell by 1.8% in January, compared with a fall of 0.5% a year ago.
The largest downward effect came from motor fuels. The price of petrol fell by 3.1 pence per litre between December and January, compared with a rise of 0.8% per litre between December 2024 and January 2025. Similarly, diesel prices fell by 3.2 pence per litre last month, compared with a rise of 1.5 pence per litre the previous year.
The second largest downward effect came from air fares, which tend to rise into December and fall into January, the ONS said.
Industry experts said the latest figures are likely to strengthen the case for an interest rate cut in March.
Luke Bartholomew, deputy chief economist at Aberdeen, said: “The drop in inflation back to 3% should clear the way for the Bank of England to cut interest rates in March. Granted services inflation was a tad stronger than expected, and this does play an important role in the Bank’s thinking.
“But with labour market data pointing to ongoing weakness in employment and a further softening in pay growth, most policymakers are likely to look through any short-run stickiness in the services data. Indeed, inflation is set to fall further in coming months, falling back to 2% in the near future, which should open up further rate cuts later this year.”
Chris Beauchamp, chief market analyst at IG, said: “A month-on-month drop in both headline and core inflation certainly delivers the goods for the UK economy, clearing the way for a fresh rate cutting campaign by the Bank of England.
“It looks like Britain, and her embattled government, have managed to come through the summer’s hotter run of inflation, and provides some hope that we can see a sustained improvement in employment and growth figures by year end.”
Adam Hoyes, senior asset allocation analyst at Rathbones, is forecasting two rate cuts in 2026.
“It is still almost certain that headline CPI inflation will decline steeply to around the 2% target by April. And the slowdown in pay growth should mean price pressures for labour-intensive services begin to ease soon too.
“So, we think the Bank of England is likely to deliver the two interest rate cuts priced into markets for this year. But unless underlying services inflation slows further, we won’t be fully convinced that headline inflation will remain at target sustainably,” he said.
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