Headline and Core Prices Ease
The United Kingdom’s annual inflation rate declined to 3% in January, according to fresh data released by the Office for National Statistics. The figure matched economists’ expectations and marked a slowdown from the 3.4% recorded in December.
Core inflation, which excludes more volatile items such as energy, food, alcohol and tobacco, also edged lower to 3.1%, compared with 3.2% the previous month. The reading represents the lowest annual inflation rate since March 2025, reinforcing signs that price pressures may be gradually easing.
The British pound remained broadly unchanged following the release, trading around $1.3562 against the U.S. dollar.
Energy and Travel Costs Drive the Decline
According to ONS Chief Economist Grant Fitzner, the fall in inflation was supported by lower petrol prices and a retreat in airfares after December’s seasonal surge. Food prices also contributed to the slowdown, particularly in categories such as bread, cereals and meat.
However, the relief was not uniform. Higher costs for hotel stays and takeaway meals partially offset the downward pressure from fuel and grocery items.
Labor Market Signals Cooling Momentum
Recent labor market data has added to expectations that inflationary pressures are easing. The unemployment rate climbed to 5.2% in December, the highest level in five years, suggesting growing softness in hiring conditions.
At the same time, annual wage growth — a key indicator closely monitored by the Bank of England — slowed in the final quarter of 2025. A moderation in wage gains could ease upward pressure on services inflation, which has proven persistent in recent years.
Meanwhile, the broader economy showed limited momentum. Gross domestic product expanded by only 0.1% in the fourth quarter, underscoring the fragile state of growth. Further insight into economic activity is expected with the release of purchasing managers’ index data later this week.
Implications for Bank of England Policy
Financial markets are increasingly anticipating that the Bank of England may cut its benchmark interest rate, currently set at 3.75%, at its next policy meeting in March.
Analysts suggest that the combination of easing inflation, weaker wage growth and slowing economic activity creates room for additional monetary stimulus. Some forecasts indicate the central bank could deliver multiple 25-basis-point reductions this year, potentially bringing the policy rate closer to 3% by year-end.
While inflation remains above the Bank’s 2% target, recent data points to more broad-based disinflation across sectors. If the trend continues, policymakers may feel more confident that price pressures are moving sustainably toward their objective.
