Inflation falls to 3% boosting chance of interest rate cuts

The rate of Consumer Prices Index (CPI) inflation decreased to a 10-month-low of 3% in January from 3.4% in December. NewsBusinessInflation falls to 3% boosting chance of interest rate cutsThe rate of Consumer Prices Index (CPI) inflation decreased to a 10-month-low of 3% in January from 3.4% in December.Henry Saker-Clark Wednesday 18 February 2026 08:26 GMTBookmarkBookmark popoverRemoved from bookmarksClose popoveropen image in gallerySupermarkets are among those who have been dealt a blow in the Budget as the Chancellor confirmed they will face a jump in business rates amid warnings the move could push up food prices for shoppers (Alamy/PA) (Alamy/PA)Your support helps us to tell the storyRead moreSupport NowFrom reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. 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We believe quality journalism should be available to everyone, paid for by those who can afford it.Your support makes all the difference.Read moreUK inflation has fallen to its lowest since March last year due to a drop in petrol, food and airfare prices.The drop has raised the likelihood that the Bank of England will cut interest rates next month, with economists predicting that inflation is on track to drop to target levels by April.The rate of Consumer Prices Index (CPI) inflation decreased to 3% in January from 3.4% in December, the Office for National Statistics (ONS) said.The reading was in line with analyst predictions and puts inflation back on a downward trajectory after an increase in the previous month.The inflation slowdown will provide some relief for the Chancellor Rachel Reeves, amid efforts by the Bank of England to bring inflation back to the target level of 2%.Economists said on Wednesday that the latest reading has lifted hopes that central bankers will cut interest rates next month from their current rate of 3.75%, with expectations that a further cut could take place later this year.Thomas Pugh, chief economist at RSM UK said: “The sharp drop in inflation in January all but nails on a rate cut next month following yesterday’s weak labour market data.“What’s more, today’s drop was just the start of a steep slide that should take inflation to 2% in April, which will set the stage for another interest rate cut in the summer.”Rob Wood, chief UK economist at Pantheon Macroeconomics, said a March rate cut is “highly likely” following the inflation fall and increase in unemployment.On Tuesday, the ONS revealed that the UK unemployment rate struck a five-year-high of 5.2% amid another increase in the jobless rate among young people.On Wednesday, ONS figures showed that motor fuels particularly contributed to the fresh fall of inflation, with the average price of petrol falling by 3.1p per litre between December 2025 and January 2026.The average price of petrol stood at 133.2p per litre in January, down from 137.1p per litre in the same month a year earlier.Meanwhile, diesel prices also dropped, falling by 3.2p per litre compared with the previous month.ONS chief economist Grant Fitzner said: “Airfares 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 ONS reported that food and non-alcoholic drink price inflation slowed from 4.5% in December to 3.6% last month.It also meant that prices were 0.1% cheaper in January than in December, after a drop in the cost of bread and cereals.Recent price increases in alcohol and tobacco also slowed from 5.2% in December to 4.6% in January.However, this was partly offset by a rise in hotel prices, with accommodation inflation rising to 1.1% for the month after a 0.1% dip in December.Ms Reeves said: ”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.”Shadow chancellor Mel Stride said: “Inflation remains above target thanks to Labour’s choices.“Families are still feeling the pinch because of Labour’s economic mismanagement.”More aboutInflationOffice for National