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UK inflation fell sharply to 3 percent in January, strengthening the case for the Bank of England to cut interest rates at its next meeting in March.
Wednesday’s figures from the Office for National Statistics showed a slowdown from December’s figure of 3.4 percent and the lowest rate since last spring. This was in line with the expectations of economists surveyed by Reuters.
The BOE kept interest rates at 3.75 percent this month, but the decision was bitterly contested, with some policymakers arguing for an immediate quarter-point cut because of weak demand and a cold labor market.
Official data on Tuesday showed unemployment rose to 5.2 percent at the end of last year, while wage growth slowed, raising the prospect of another quarterly rate cut.
The central bank estimates inflation will fall to its target level of around 2 percent by April, thanks to budget measures aimed at curbing bill growth.
Zara Knox, global markets analyst at JPMorgan Asset Management, said the UK appeared to have “finally turned a turn” in its fight against inflation. “Today’s data shows a meaningful deceleration in headline inflation with widespread disinflation across sectors,” he said.
The decline in price growth in January, which brought the headline figure to the lowest level since March last year, was driven by food prices and transport – particularly airfares.
Education costs also dragged down the index as the VAT increase on school fees last year was smaller than the annual comparison.
Core CPI inflation, which excludes energy, food, alcohol and tobacco, declined to 3.1 per cent from 3.2 per cent in the 12 months to December 2025.
Services inflation, which is closely monitored by the BoE as a signal of underlying pressures, fell to 4.4 percent from 4.5 percent. That made it higher than the BOE’s forecast of a 4.1 percent service price rise, but analysts said that was unlikely to stop the central bank from lowering rates next month.
Even with the rising unemployment rate, private sector wage growth slowed to 3.4 percent at the end of last year, according to Tuesday’s jobs data, bringing it closer to the 3.25 percent rate that the BOE considers in line with its 2 percent inflation target.
“Yesterday’s rise in the unemployment rate to a five-year high is likely to dominate the thinking of top MPC officials, making a rate cut in March more likely,” said Rob Wood, an economist at Pantheon Macroeconomics.
The pound was steady at $1.357 against the dollar in early trade. Traders slightly strengthened their bets on a March cut, with swap contracts giving a more than 85 percent chance of a quarter-point rate cut at the BOE.
Responding to the figures, Chancellor Rachel Reeves said: “Cutting the cost of living is my first priority. Thanks to the choices we made in the Budget, we are bringing inflation down, with £150 off energy bills, rail fares cut for the first time in 30 years and prescription fees stabilised again.”
