Encouragingly, underlying inflation also dropped in January.

Core CPI (which strips out energy, food, alcohol and tobacco) rose by 3.1% in the 12 months to January 2026, down from 3.2% in December 2025.

Goods inflation dropped from 2.2% to 1.6%, while services inflation slipped from 4.5% to 4.4%.

Derrick Dunne, CEO of YOU Asset Management, says this is a ‘crucial’ move in core inflation.

“This is a significant slowdown in the rate of inflation and effectively clears the way for the Bank of England to proceed with rate cuts, especially given the broader picture of faltering GDP growth and labour market weakness.

“Perhaps most crucial in today’s data is that core inflation has now fallen to its lowest level since September 2021. Core inflation has remained stubbornly high for a number of years now and has been one of the main drivers of rate caution from the Monetary Policy Committee in recent decisions.

“Rate cuts are already priced in by markets, but if employment and GDP figures continue to disappoint then we could see rate cut expectations grow. This could come from additional cuts beyond the two forecast in March and June or from larger cuts to get ahead of the economic slowdown.”

Food inflation has dropped to its lowest level in nine months, easing the cost of living squeeze on households.

The ONS reports that food and non-alcoholic beverages prices rose by 3.6% in the 12 months to January 2026, down from 4.5% in the 12 months to December 2025

On a monthly basis, food and non-alcoholic beverages prices fell by 0.1% in January 2026, compared with a rise of 0.9% a year ago.

The ONS reports that price fell month-on-month in six food categories, including bread, meat, and dairy products.

• bread and cereals – down 0.04 percentage points

• meat – down 0.02 percentage points

• milk, cheese and eggs – down 0.01 percentage points

• food products not elsewhere classified – down 0.01 percentage points

• coffee, tea and cocoa – down 0.01 percentage points

• mineral waters, soft drinks and juices – down 0.01 percentage points

Dr Liliana Danila, lead economist at The Food and Drink Federation, (FDF), says:

“It’s positive to see a lower rate of food inflation in January, however it still remains a real worry for household budgets and above long-term averages. After many years of rising costs businesses across the supply chain have had their margins eroded, leaving manufacturers particularly susceptible to the supply chain shocks caused by geopolitics or climate change. We’ve previously seen the impact that this can have on inflation, with prices of ingredients like cocoa and coffee skyrocketing, so the UK’s recent extreme wet weather flooding farms is a concern for the year ahead.

“To help stabilise food inflation in the long term and protect shoppers from future price spikes, government must incentivise investment in business resilience.”

The chances of an interest rate cut next month have risen this morning, following the news that UK inflation fell to 3% in January.

The money markets are now indicating that a quarter-point rate cut is now an 81.5% chance, up from 77% last night – and around 65% last week.

The Bank of England’s monetary policy committee voted narrowly to leave rates on hold earlier this month, in a 5-4 split, so it only takes one ‘hold’ voter to change their mind.

Scott Gardner, investment strategist at JP Morgan Personal Investing says":

“Inflation fell sharply in January, providing some relief to UK consumers at the start of the year. Prices are clearly moving in the right direction, with closely watched core and services inflation continuing their downward trend from previous months.

“Behind the headline figure, motorists were helped as petrol pump prices continued to decline in January to their lowest level since summer 2021. Food inflation also fell after the Christmas period but is still a key area to watch in 2026 as it accounts for a large part of the UK’s everyday spending. Industry barometers suggest that weekly supermarket shops are still elevated with fresh produce prices rising over the month.

“In theory, this fall in inflation could signal a rate cut from the Bank of England at its March meeting barring any surprises between now and then. The progress made on the inflation front over recent months and clear cooling in the jobs market could encourage policymakers to cut interest rates for a seventh quarter in a row. With that said, the Bank of England will remain vigilant as services inflation remains elevated.

In another encouraging sign, the costs paid by UK factories fell last month.

The Office for National Statistics reports that producer input prices fell by 0.2% in the year to January 2026, down from 0.5% in the year to December 2025.

That was mainly due to cheaper crude oil, where prices fell 23.8% over the past year.

With input costs falling, factories felt less pressure to raise their own prices in response.

Producer output prices (also known as prices at the ‘factory gate’) rose by 2.5% in the year to January 2026, down from 3.1% in the year to December 2025.

ONS chief economist Grant Fitzner says:

“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.”

A drop in transport costs helped to push UK inflation down in January.

The ONS reports that prices in the transport division rose by 2.7% in the 12 months to January 2026, down from 4.0% in the 12 months to December.

The largest downward effect came from motor fuels, where the average price of petrol fell by 3.1p per litre between December 2025 and January 2026. That pushed the average price of petrol down to 133.2p per litre in January 2026, down from 137.1p per litre a year earlier.

The second-largest downward effect came from air fares, which tend to rise into December and fall into January, as this chart shows:

The ONS explains:

Whereas the pattern of air fares rising into December and falling into January was less pronounced last year, the index this year followed a more conventional pattern, perhaps because the return flights in December did not fall on Christmas Eve and New Year’s Eve.

The more pronounced rise into December 2025 and fall into January 2026 led to a large upward contribution to the change in the annual rate in December 2025 and a large downward contribution in January 2026.

Here’s ONS chief economist Grant Fitzner on this morning’s drop in UK inflation:

“Inflation fell markedly in January to its lowest annual rate since March last year, driven partly by a decrease in petrol prices.

“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.

Newflash: Britain’s inflation rate has dropped to its lowest level in almost a year.

The Consumer Price Index, which measures prices changes across the economy, has dropped to 3.0% in January, the Office for National Statistics reports, in line with City forecasts.

That’s down from 3.4% in December, and the lowest rate of annual inflation since March 2025.

Good morning. We’re about to learn if the UK’s cost 0f living squeeze eased last month.

Inflation data for January is due to be released at 7am, and City economists predict a slowdown in the pace of price rises.

The consumer price index (CPI) is forecast to have dropped to 3% in January, down from 3.4% the previous month, and back towards the Bank of England’s 2% target.

If CPI inflation does fall to 3%, that would be the lowest level since March 2025.

A drop in inflation would be welcome, after the CPI rate rose in December for the first time in five months.

But, a drop in inflation doesn’t mean prices are actually falling, just that they’re rising at a slower rate, compared with a year ago.

Victoria Scholar, head of investment at interactive investor, says,

The sluggish economic backdrop and a cooling labour market (especially wage growth), several measures announced in the Budget and base effects from last April when there was a bump in inflation due to energy prices are all contributing to an easing inflationary picture.

Although month-to-month inflation can be bumpy, these factors are expected to allow inflation to return to the Bank of England’s 2% target by Q2 2026 and probably remain around that level.

Investec Economics economist Ellie Henderson has predicted that food price growth is also likely to have dropped to 4.2%, but warned there was a risk that food inflation was still a “key concern”.

The agenda

• 7am GMT: UK inflation report for January

• 9.30am GMT: UK house prices and rents data for December

• 1.30pm GMT: US housing starts and building permits data

• 1.30pm GMT: US durable goods orders