UK inflation fell to 3% in January 2026, down from 3.4% in December, marking its lowest level in 10 months, according to Office for National Statistics data released this week. The decline has prompted financial markets to increase expectations of a Bank of England base rate cut at its next meeting on 19 March.
The Consumer Prices Index reading represents the lowest inflation rate since March 2025, when it stood at 2.6%. Markets are now pricing in an 84% probability that the Bank will reduce the base rate from 3.75% to 3.5% next month.
Transport and food costs drive decline
The ONS attributed the fall to easing transport and food costs. Air fares reversed December’s spike, whilst petrol prices dropped by 3.1p per litre between December 2025 and January 2026. Food inflation eased to 3.6% from 4.5%, the lowest level in nine months.
Yael Selfin, Chief Economist at KPMG UK, told the Telegraph that the decline in inflation “paves the path” for a cut, stating: “Today’s inflation data will likely prompt the Bank of England to lower interest rates next month. The MPC will welcome the broad-based fall in inflation, with both headline and underlying measures of inflation easing.”
Divided economic opinion
Not all economists agree on the timing of potential cuts. Ellie Henderson of Investec cautioned: “Inflation at 3% is still some way above the Bank of England’s 2% target, meaning that caution should still prevail when it comes to loosening policy further.”
Kallum Pickering, Chief Economist at Peel Hunt, suggested the Bank may have delayed action: “The clear risk now is that the bank has fallen behind the curve and will need to play catch-up.”
Property market implications
Nathan Emerson, CEO of Propertymark, said: “A fall in inflation is a welcome step in easing cost-of-living pressures and will help improve confidence among consumers and businesses. Lower inflation strengthens the case for a more stable interest rate environment, which is crucial for both mortgage affordability and investment in housing.”
Hina Bhudia, Partner at Knight Frank Finance, noted: “The combination of softer inflation data this morning and weak jobs figures yesterday raises the likelihood of two rate cuts this year. Leading fixed rates have remained steady in the past four weeks, and there has been considerable jostling for position in the middle of the market.”
Bhudia added: “We think this week’s figures will pave the way for fixed rates to ease further in the coming month, leading up to the next interest rate decision on March 19th. Any falls will be incremental, but they will have a meaningful impact on sentiment.”
John Phillips, CEO of Just Mortgages and Spicerhaart, reported strong market activity: “January provided a strong start to the year, and that has continued into February with robust buyer registrations and increasing demand for both valuations and mortgage appointments.”
Jonathan Samuels, CEO of Octane Capital, commented: “Today’s inflation data shows a welcome step back in price pressures, with headline CPI easing to around 3.0% in January. This suggests that the temporary uptick seen at the end of 2025 has likely subsided.”
The Bank of England’s Monetary Policy Committee will announce its next interest rate decision on 19 March 2026, with inflation remaining above the 2% target but showing a downward trajectory.
