Britain’s annual inflation rate eased significantly in January, reinforcing expectations that the Bank of England could lower borrowing costs at its upcoming March meeting. Consumer price inflation rose 3.0% year over year in January, down from 3.4% in December and marking the lowest reading since March 2025.
December’s figure had edged up from 3.2% in November, representing the first increase in five months. The latest pullback suggests that price pressures may be softening more decisively at the start of the year.
While inflation remains above the Bank of England’s 2% target, policymakers signaled at their February meeting that additional rate reductions could be on the table later this year. Officials expect inflation to return to the 2% goal by spring, and potentially more quickly than earlier projections suggested.
On a monthly basis, the consumer price index fell 0.5% in January after posting a 0.4% gain in December. Core CPI, which strips out volatile food and energy costs, declined 0.6% month over month. On an annual basis, core inflation eased to 3.1% from 3.2% in December.
“Overall, the print strengthens the case for a potential Bank of England rate cut at its March meeting, particularly after recent data showed softer wage growth and rising unemployment,” said Lale Akoner, global market analyst at eToro. “However, policymakers remain divided, and sticky services inflation could keep the debate finely balanced. If inflation falls mainly on energy and base effects, the Bank of England may cut cautiously rather than aggressively.”
Separate data released Tuesday showed that U.K. annual wage growth excluding bonuses slowed to 4.2% in the final three months of 2025 compared with a year earlier. The central bank closely monitors pay trends as an indicator of how persistent above-target inflation might be.
Earlier this month, the Monetary Policy Committee voted 5-4 to keep interest rates unchanged at 3.75%, the lowest level since early February 2023. The narrow split underscored ongoing divisions among policymakers over the appropriate pace of easing.
“It’s no secret that inflation will decline steeply in April, perhaps to below 2.0%, as this is when the raft of rises in government-set prices and taxes in 2025 drop out of the annual comparison,” analysts at Capital Economics wrote in a note. “And if we are right in thinking that CPI inflation will average 1.8% in Q4 of this year, then the MPC may ultimately end up cutting rates further than investors expect, to 3.0% this year, with the chances of the next rate cut happening in March rather than our current forecast of April edging higher.”
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