UK inflation drops to 3% in January

Britain’s yearly inflation rate slowed down in January, matching expectations and increasing hopes that the Bank of England may reduce its main interest rate next month.

Official figures released on Wednesday showed that the Consumer Prices Index dropped to 3.0 per cent in January, down from 3.4 per cent in December. The data was published by the Office for National Statistics.

Grant Fitzner, chief economist at the statistics office, said: “Inflation fell… to its lowest annual rate since March last year, driven partly by a decrease in petrol prices.”

The latest figures support earlier guidance from the Bank of England that inflation is expected to move closer to its two per cent target in the months ahead. Lower energy costs are helping to balance out rising water bills and other high household expenses.

The BoE left its benchmark interest rate at 3.75 per cent earlier this month but signalled that further cuts were ahead.

While wage growth in Britain has slowed in the private sector, it remains elevated in the public sector, according to official figures, which show UK unemployment at a five-year high of 5.2 per cent.

Prime Minister Keir Starmer’s Labour Party has struggled to revive Britain’s sluggish economy since winning a general election in July 2024, having raised taxes in its two annual budgets.

“Thanks to the choices we made at the budget, we are bringing inflation down,” finance minister Rachel Reeves said in a statement responding to the inflation data release.

Official figures last week showed that Britain’s economy grew less than expected in the final quarter of 2025, and the BoE this month cut its forecasts for UK growth this year and next.

The central bank now estimates gross domestic product growth to hit 0.9 per cent this year and 1.5 per cent in 2027.

It had previously forecast GDP output of 1.25 per cent for 2026 and 1.6 per cent for next year.

“As the economy barely kept afloat towards the end of last year, and the labour market and wage growth have cooled considerably, the Bank will likely feel increasingly comfortable cutting rates as 2026 progresses,” said Jonathan Raymond, an investment manager at Quilter Cheviot.

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