Britain’s annual consumer price inflation slowed in January to its lowest level since March last year, according to official data released on Wednesday. However, a key measure of underlying inflation — closely monitored by the Bank of England — remained elevated, highlighting persistent domestic price pressures.
The Office for National Statistics reported that consumer prices rose 3.0% year-on-year in January, down from 3.4% in December. The slowdown was largely driven by softer increases in transport, food, and non-alcoholic beverage prices.
Economists polled by Reuters had forecast headline inflation at 3.0%, in line with the official reading. Earlier this month, the Bank of England projected inflation would ease slightly further to 2.9%.
Services inflation remains sticky
Services inflation — seen as a strong indicator of domestic cost pressures — edged down to 4.4% in January from 4.5% in December. The decline was smaller than expected, as analysts had predicted a fall to 4.3%. The data suggests that underlying inflationary pressures remain relatively firm despite the broader moderation in headline CPI.
Compared with other major economies, UK inflation continues to run higher. In January, inflation stood at 2.4% in the United States and 1.7% in the euro area.
The British pound was little changed against the U.S. dollar following the inflation release.
Interest rate outlook and economic backdrop
The Bank of England expects inflation to slow more sharply in April, moving closer to its 2% target. This anticipated drop reflects the fading impact of last year’s increases in utility bills and government-regulated tariffs from annual comparisons.
Financial markets widely expect the central bank to cut its benchmark interest rate to 3.5% in March, following a closely divided decision to keep rates unchanged in February. Markets have also priced in an additional quarter-point rate cut by the end of 2026.
Despite expectations of policy easing, some policymakers remain concerned about persistent underlying inflation pressures.
Recent data has also pointed to a fragile economic backdrop. Official figures last week showed that Britain’s economy barely expanded at the end of 2025. Separate labour market data released on Tuesday indicated ongoing job losses, although there were tentative signs of stabilisation.
