UK Inflation Expected to Fall to 3% in January, Lowest Level in Nearly a Year
Most economists are predicting that official figures due on Wednesday will show UK inflation dropped sharply to 3% in January, down from 3.4% in December. According to forecasts from Pantheon Macroeconomics, this would mark the lowest Consumer Prices Index (CPI) reading since March 2025, providing a significant boost to hopes for imminent interest rate cuts.
Drivers Behind the Expected Decline
The anticipated fall is attributed to several key factors. Lower airfares, reduced food price inflation, and moderating energy costs are all expected to have contributed to the decline. Pantheon experts note that airfares likely plummeted by nearly a quarter in January, following a surge in December due to festive travel demand. Additionally, food price growth is projected to have slowed to 4.2%, below November's levels, though some analysts warn that food inflation remains a concern.
Interest Rate Cut Expectations Intensify
This inflation data is likely to reinforce expectations for another interest rate cut, potentially as soon as next month. Disappointing growth figures for the final quarter of 2025, which showed GDP eking out a meagre 0.1% expansion, have added to forecasts for a reduction in March. The current base rate stands at 3.75%, with predictions pointing to a cut to 3.5%.
Bank of England's Cautious Stance
However, Bank of England chief economist Huw Pill has expressed caution, suggesting that interest rates might already be "a little bit too low." Speaking at a Santander event on Friday, Pill indicated he would likely not vote for a reduction next month. He was part of the 5-4 majority on the Monetary Policy Committee that recently voted to hold rates steady at 3.75%.
The Bank forecasts inflation will fall to its 2% target by mid-year, aided by measures announced in the Chancellor's autumn budget, including support to lower household energy bills from April. Pantheon expects a steep drop in inflation as energy, airfares, education, and food price inflation all slow, though it predicts a slightly higher rate of 3% compared to the Bank's 2.9% estimate.
Additional Downward Pressures
Investec Economics economist Ellie Henderson highlighted other factors pushing inflation lower. VAT on private school fees falling out of annual comparisons and heavier-than-usual retail discounting are contributing. She also noted that utility prices provided a small downward pressure, with electricity prices rising nearly 5% but gas prices falling, resulting in a modest 0.2% increase in the energy price cap for January.
Broader Economic Context
The inflation figures come during a busy week for UK economic statistics, with data on unemployment and wages due on Tuesday, followed by government borrowing and retail figures on Friday. This series of releases will provide a comprehensive view of the economic landscape as policymakers weigh future monetary decisions.
