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U.K. inflation cooled more than expected in January, reinforcing expectations that the Bank of England could move to cut interest rates as early as its next policy meeting in March.
Annual consumer price inflation slowed to 3.0% in January, down sharply from 3.4% in December. The December reading had marked a modest uptick from 3.2% in November, ending a five-month streak of declines. While inflation remains above the BoE’s 2% target, the latest data point to a faster-than-anticipated easing in price pressures.
On a monthly basis, consumer prices fell 0.5% in January, reversing a 0.4% increase in December. Core inflation—which excludes volatile food and energy prices—also declined on a monthly basis, falling 0.6%, while the annual core CPI rate eased to 3.1% from 3.2% previously.
The inflation data follow signs of cooling in the labor market. Figures released earlier this week showed that annual wage growth excluding bonuses slowed to 4.2% in the three months to the end of 2025, compared with the same period a year earlier. Wage dynamics remain a key focus for the Bank of England, as policymakers closely monitor pay growth as an indicator of how persistent above-target inflation may be.
At its February meeting, the Bank of England signaled that further interest rate cuts are likely later this year, projecting inflation to return to the 2% target by spring—sooner than previously expected. The Monetary Policy Committee voted narrowly, 5–4, to keep rates unchanged at 3.75%, the lowest level since early February 2023.
Taken together, easing inflation, moderating wage growth, and a softening economic backdrop are increasing market confidence that the BoE may soon begin the next phase of monetary easing.
