The cost of food, petrol, and travel caused the UK’s inflation rate to drop from 3.4% in December to 3% in January. The drop, according to economists, increased the possibility that the Bank of England will lower interest rates at its monetary policy meeting in March. The “marked” decline in January brought inflation to its lowest level since March 2025, according to the Office for National Statistics (ONS). While the rate of inflation has decreased, prices are just increasing more slowly rather than decreasing.
“Inflation dropped significantly in January to its lowest annual rate since March of last year, driven partly by a decline in petrol prices,” stated Grant Fitzner, chief economist for the ONS.This month, airfares were another factor that caused prices to decline after rising in December. However, he added that the price of hotel stays and takeaway somewhat offset the decreased prices for meat, bread and cereals.
The Bank of England is more likely to lower its benchmark interest rate, which is presently set at 3.75%, given Wednesday’s decline in inflation, which follows data showing a slowing in wage growth. Since the government started lowering family energy prices in April, economists anticipate that inflation will continue to decline in the upcoming months. According to forecasters Cornwall Insight, the action would contribute to a reduction in the average household’s energy price cap of £117 to £1,641 starting in April. KPMG chief economist Yael Selfin said: “Given the favourable inflation outlook, the Bank is expected to cut interest rates three times this year, leaving interest rates at 3% by the end of 2026.”
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