UK inflation falls to 3%, giving hopes of early cut in interest rates

UK inflation tumbled to 3% in January, giving a boost to hopes of an early cut in interest rates by the Bank of England.The drop was in line with a majority of City economists’ forecasts and marks the lowest level since March 2025.The Office for National Statistics said that falls in petrol prices, air fares and food had driven the drop.Inflation peaked last year at 3.8% and most economists expect it to drop back quickly to the Bank’s 2% target this year. The latest figures would allow for a rate cut as early as next month, with Threadneedle Street’s policymakers concerned about the slowing pace of economic growth.The ONS chief economist, Grant Fitzner, said that, along with petrol prices, “air fares were another downward driver this month with prices dropping back following the increase in December.“Lower food prices also helped push the rate down, particularly for bread & cereals and meat. These were partially offset by the cost of hotel stays and takeaways.“The cost of raw materials for businesses fell over the past year, driven by lower crude oil prices, while the increase in the cost of goods leaving factories slowed.”The country’s GDP expanded by only 0.1% in the three months to the end of December, the Office for National Statistics said last week. Unemployment increased to a five-year high of 5.2%, according to official figures covering the same period. Private sector earnings grew by 3.4% over the year to December.The chancellor, Rachel Reeves, will be cheered by figures showing that the cost of the weekly shop rose at a weaker pace last month, allowing households to benefit from a rise in living standards.Reeves used the budget in November to cut the cost of living, mainly through reductions in energy bills and rail fares, and the effects of these measures should lead to a further drop in the consumer prices index in April.Reeves said on Wednesday: “Cutting the cost of living is my number one priority. Thanks to the choices we made at the budget we are bringing inflation down, with £150 off energy bills, a freeze in rail fares for the first time in 30 years and prescription fees frozen again.“Our economic plan is the right one, to cut the cost of living, cut the national debt, and create the conditions for growth and investment in every part of the country.”