The latest figures from the Office for National Statistics show the Consumer Prices Index (CPI) rose by 3.0% in the 12 months to January 2026, down from 3.4% in December, while CPIH stood at 3.2%, down from 3.6%. On a monthly basis, CPIH fell by 0.3% in January, compared with little change a year earlier, highlighting a clear cooling in price pressures. The Retail Prices Index, which is no longer a National Statistic but is still tracked by markets, recorded annual inflation of 3.8% in January.
Commenting on today’s inflation figures for January, ONS Chief Economist Grant Fitzner said: “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. 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.”
Bank of England under pressure – economists’ views
With headline inflation now just one percentage point above the Bank of England’s 2% target, attention is turning to the timing and pace of interest rate cuts. Many analysts now believe the next Monetary Policy Committee meeting in March could deliver the first cut of 2026 if data remain benign.
Luke Bartholomew, Deputy Chief Economist at Abderdeen, said: “The drop in inflation back to 3% should clear the way for the Bank of England to cut interest rates in March. Granted services inflation was a tad stronger than expected, and this does play an important role in the Bank’s thinking. But with the labour market data yesterday pointing to ongoing weakness in employment and a further softening in pay growth, most policymakers are likely to look through any short run stickiness in the services data. Indeed, inflation is set to fall further in coming months, falling back to 2% in the near future, which should open up further rate cuts later this year.”
Jonathan Moyes, Head of Investment Research at Wealth Club, also expects a move next month. He said: “Inflation took a step lower today, but fell short of breaking into the 2% range. We are going to be hearing a lot about base effects this year. Big inflationary spikes from energy, employers’ national insurance, and the private school fee VAT hike from earlier in 2025 that should roll out of the 12-month window for inflation as we move through 2026. This will have a cooling effect on inflation, and we should see inflation fall back to 2% this year. On the back of weak employment and wage growth data from yesterday, there would have been many revising their expectations for inflation overnight.
“Instead, inflation came in bang in line with expectations. The market reaction is expected to be muted as a result. What does all this mean for the Bank of England? The next meeting is on 19 March. With a deteriorating labour market, weak wages, weak economic growth, and no ugly surprises on inflation, it is likely we will see our first rate cut of 2026. The economy may need several more before it begins to show signs of life. For an embattled government starved of good news, they couldn’t come soon enough.”
Households, savers and borrowers – savings expert view
For households, the retreat in inflation offers some relief after the small uptick seen at the end of last year. But with prices still rising year on year, the impact on real incomes and savings remains a central concern.
Kevin Brown, savings expert at Scottish Friendly, said: “Many households will welcome this morning’s inflation figure of 3%, as it suggests December’s uptick was not the start of a renewed trend upwards. It seems now the journey back towards the Bank of England’s 2% target has regained momentum. That matters not only for policymakers considering rate cuts, but for households whose financial planning depends on the direction of prices. The key point, however, is that inflation easing is not the same as inflation disappearing. Even at 3%, prices are still rising meaningfully year on year.
“Compounded over time, that continues to shape the real value of savings. For borrowers, this strengthens the case for the Bank of England’s Monetary Policy Committee to trim rates in March. For savers, the picture becomes more nuanced. As inflation falls, interest rates are also likely to continue to ease, which could narrow the window for locking in attractive cash returns. Cash provides stability and plays an essential role in short-term planning. But when inflation is persistent, preserving purchasing power over the long term may require looking beyond cash alone. Considering investing can be one way to potentially help savings keep working over time, rather than gradually losing ground.”
Property and investment outlook – real estate perspective
While falling inflation supports the case for lower borrowing costs, property specialists warn that the broader environment for buyers and developers remains challenging. Confidence in the mainstream housing market is still fragile, and many projects remain on hold as participants wait for clearer signals on rates.
Daniel Austin, CEO and co‑founder at ASK Partners, said: “UK inflation easing back to 3% is a significant step in the right direction, but it doesn’t materially change the ‘higher for longer’ backdrop facing households and property markets. The broader disinflation trend remains intact, yet the journey back to target is unlikely to be linear, which continues to keep confidence fragile among buyers and developers. Mortgage pricing has improved and recent rate cuts are welcome, but it will take time for any meaningful reduction in monthly costs to filter through. In property, this is unlikely to shift the entrenched wait-and-see mindset in the mainstream market.
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“Capital will continue to favour structurally resilient, income-led sectors such as build-to-rent, co-living, logistics, self-storage and data centres, where chronic undersupply underpins demand. A clearer, sustained downward path for inflation and rates would be the real catalyst for unlocking stalled projects. Until then, disciplined, income-focused and debt strategies remain a pragmatic way for investors to stay active while carefully managing downside risk.”
Across markets, the combination of slowing inflation, expectations of rate cuts and still-sluggish growth is likely to keep defensive, income-generating assets in focus. As base effects and weaker cost pressures work through the system over 2026, policymakers and investors alike will be watching whether inflation can be brought back to 2% and held there without pushing the economy into a deeper downturn.
