UK inflation falls in January 2026 with Bank of England interest rate cut expected

Inflation fell to a 10-month low of three per cent in the year to January 2026, the Office of National Statistics has reported.

Decreases in price rises in the cost of petrol and food including cereal were cited as key factors towards the sharp month-on-month 0.5 per cent improvement.

An interest rate cut from the Bank of England is now on the cards, which will bring hope for borrowers and businesses alike.

A sharp drop

The Consumer Price Index (CPI), an estimate of household prices for goods and services, sharply decreased to three per cent in the year to January 2026.

This figure reflects that prices are more expensive now than in January 2025, but prices for consumers have increased at a slower rate in January 2026 compared to December 2025.

In December 2025, CPI hiked to 3.5 per cent driven by airfare prices and newly introduced tobacco duties.

The January figure is 0.4 per cent ahead of the smallest figure, 2.6 per cent in March 2025, across the last year.

Transport and food saw the biggest improvements as CPI matched the figure estimated 12 months ago.

Transport fell by 0.15 per cent month-on-month, while the price of petrol trended downwards by 3.1 pence per litre between December and January.

The average price of petrol in January was 133 pence per litre, with diesel at 142.5 pence per litre – a cut of 3.2 pence per litre.

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Interest rate cut

The interest policy rate, set by the independent Bank of England, is a strong reflection on borrowers’ willingness to pay for money that will be paid back in the future.

Those negotiating a mortgage and climbing the property ladder were hit hard during the 2022 ‘mini-budget’ led by Liz Truss and Kwasi Kwarteng.

A peak CPI rate of 11.1 per cent hammered anyone buying a house.

Despite the three per cent figure not meeting the Bank of England target of two per cent, an interest rate cut is likely from 3.75 per cent.

The Bank of England elected to keep the policy rate stagnant last month after speculation the rate would be cut.

The cost of borrowing would be cheaper if the policy rate was slashed.

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Political reactions follow

Labour Chancellor of the Exchequer Rachel Reeves claimed the improvement showed that cutting the cost of living was the “number one priority”.

Reeves said: “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.”

But Conservative Shadow Chancellor Mel Stride cited five-year record unemployment figures, at 5.2 per cent, in a rebuttal.

“Britain is not being governed – the economy is weaker and working people are paying the price,” Stride noted.

“Only the Conservatives have a plan for a stronger economy, and a leader with the backbone to deliver that plan and get Britain working again.”

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