UK inflation has fallen to a 10-month low of 3% on the Consumer Price Index (CPI) measure, according to the Office for National Statistics (ONS).
The figures for January 2026 show transport and food made the largest downward contributions to the rate of price increases, which has fallen from 3.4% in December 2025.
Core CPI, which excludes volatile categories such as energy, food, alcohol and tobacco, inched down from 3.2% to 3.1%. However, this is now at the lowest level since September 2021 – when the cost-of-living crisis was beginning.
Grant Fitzner, chief economist at the ONS, commented on this morning’s figure: “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 drive this month with prices dropping back following the increase in December. Lower food prices also helped push the rate down, particularly bread, cereals and meat. These were partially offset by the cost of hotel stays and takeaways.”
Economic context
The slowdown in the rate of inflation is good news for hard-pressed households who have borne the brunt of high price rises in the past few years.
Although inflation sank to 2% in June 2024, it has been uncomfortably high in the past 18 months. Economists believe that households can now look forward to a more stable environment.
Anna Leach, chief economist at the Institute of Directors (IoD), explains: “This expected decline in inflation marks the start of a more benign inflationary trend for the UK. Today’s figures bring CPI back into the Bank of England’s target range for the first time in 10 months.”
Martin Sartorius, lead economist, Confederation of British Industry (CBI), agrees: “Inflation ticked down in January, broadly in line with the Bank of England’s projections.
“We expect this downward momentum to continue in the coming months, reflecting the fading impact of last year’s energy and utility price increases.”
Bank of England decision
Both economists agree that the outlook now points to lower inflation and therefore interest rates. A cut to the base rate is now anticipated as early as March.
“With the unemployment reaching 5.2% – which is the highest since 2015 when you exclude the pandemic,” Leach adds, “Today’s inflation number should help incline minds at the Bank of England towards a rate cut in March.
“Inflation is set to fall rapidly in the coming months, stabilising costs for households and supporting real household incomes. This, alongside further falls in interest rates, may finally shift households into spending, giving the economy some much needed support.
“However, the outlook for the labour market is more concerning. Rising unemployment – particularly among young people – may yet keep the breaks on the economy.”
Finally, Sartorius points out that further reductions could be more limited as rate setters continue to be cautious about inflation:
“January’s slowdown in inflation, alongside cooling labour market conditions, increases the likelihood that the Monetary Policy Committee will cut rates again over the next couple of months.
“Beyond then, the scope for further Bank Rate reductions will become more limited, as the Committee looks to ensure that inflation returns sustainably to the 2% target.”
How inflation, the labour market and Bank of England rate decision affect your long-term financial plans might not be immediately obvious. While it is important to be aware of big picture economic events, this should not hamper your long-term goals.
If you have any questions or concerns about the themes expressed in this article, don’t hesitate to get in touch.