The Consumer Prices Index (CPI) figure, reported by the Office for National Statistics (ONS), was the lowest since March 2025 and significantly below the 3.4% recorded for December 2025, though it did match the expectations of most City economists.
Inflation is predicted to continue to slow in 2026, with the Bank of England expecting to be within touching distance of its target level of 2% from April. This could be enough to trigger an interest rate cut as early as next month.
Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, said: "These figures make a spring interest rate cut look almost assured, though a lingering question among policymakers will be whether to pull the trigger in March or April as some may want slightly more evidence of easing inflation before reducing rates."
What caused inflation to drop to 3%?
January's inflation drop was mostly down to slowing growth in the cost of food and transport in the 12 months to January 2026. Food and non-alcoholic drinks prices grew by 3.6%, a sharp drop from the December 2025 figure of 4.5%. Petrol and diesel prices actually fell by 2.2%.
The CPI figure for core inflation, which excludes energy, food, alcohol and tobacco, dropped to 3.1%, from 3.2% for the previous month. Education costs also played a part, with the final month in which VAT was not charged on private school fees dropping out of the 12-month comparison.
Grant Fitzner, chief economist at the ONS, 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 and cereals and meat. These were partially offset by the cost of hotel stays and takeaways."
The most significant obstacle to inflation getting even closer to the Bank of England’s 2% target in January was services inflation, a key sign of underlying price pressures. This fell by just 0.1%, from 4.5% to 4.4%, well below the Bank’s forecast of a 0.4% fall to 4.1%.
Will there now be an interest rate cut in March?
The Bank of England's Monetary Policy Committee (MPC) will next meet on 19th March 2026 to decide whether the base rate of interest should change. At its last meeting on 5th February 2026, the MPC voted by a slim 5-4 majority to hold the rate at 3.75%.
At the time of writing, the swaps market is currently giving a 86% chance of a 0.25 point cut in March, up from 77% before the ONS inflation announcement.
The Bank expects to be close to its inflation target of 2% by April, though this is not the only number closely watched by the MPC. Private sector wage growth eased to 3.4% at the end of last year, amidst unemployment rising to 5.2%, bringing it towards the Bank's 3.25% target. Slowing wage growth and rising unemployment is, generally, bad news for the economy. However, it does make an interest rate cut more likely, as the Bank will be less worried about inflation rising if disposable income growth is slowing.
Rob Wood, an economist at Pantheon Macroeconomics, said: "Yesterday’s rise in the unemployment rate to a five-year high will likely dominate the thinking of the doves on the MPC, leaving a March rate cut as highly likely".
If you are interested in learning more about where interest rates might go in the future, check out our article on the latest UK interest rate predictions.
How will the inflation figures affect mortgages?
The odds on a 0.25% March cut to the Bank of England base rate are now looking very favourable, though there is still some scepticism that this would trigger more than one additional drop in 2026. The base rate going down would be great news for anyone looking to remortgage or buy a home in the coming months, as mortgage rates tend to follow the trajectory of the base rate, though expected interest rate cuts are usually priced in ahead of time for fixed-rate deals.
Based on a loan-to-value ratio of 60%, the lowest two-year fixed-rate mortgage deal on the market currently comes in at 3.58% and the best five-year fixed-rate mortgages offer rates from 3.75%. Those looking for a two-year tracker deal can find rates as low as 3.86%, while the best five-year tracker deal is 4.35%. The top deals can be found in our regularly updated article, 'The best mortgage rates in the UK'.
If you are unsure about the best type of mortgage for you, read our article 'Remortgaging in 2026', where Damien examines whether now is the right time to fix your mortgage rate.
What does inflation mean for savers?
Inflation has fallen to 3%, but it is still well above the government target, which is bad news for savers. It is easy to assume that high inflation brings about high interest rates and better returns for savers, but that does not always work out in practice. While it is true that inflation remaining above the 2% target means that the base rate of interest could be maintained higher for longer, high inflation is still bad news for your savings.
Banks often take much longer to pass on rate rises to savers than they do borrowers. This means it can take a long time for high inflation figures to translate to a boost in the interest rate on your savings. Also, inflation erodes the value of cash, so your money in the bank will buy you less as the cost of living goes up.
However, slowing inflation is good news for savers, as what you have put away should hold its value for longer, even if it triggers a rate cut that reduces the headline interest on your account. You can find the best savings accounts in our article ‘Best savings accounts in the UK’.
What to do if you are struggling to pay your bills
Many essential household costs are still on the rise. Food bills are going up, energy costs remain high and many household incomes are not keeping pace with the cost of living. However, there is help available if you are struggling.
If you think you might fall behind on your household bills, the best thing to do is to reach out to the relevant supplier in the first instance. If you explain your situation, there will typically be steps they can take to help you come up with a payment plan that works for both parties.
It's also a good idea to make sure you are claiming all of the support you might be entitled to. You can check your eligibility for various benefits through the website entitledto.
We also have several articles that may be more specific to your situation and could offer further help:
- How to save money on your energy bills
- How to save money on your water bills
- How to save money on your mortgage
- How to save money on your council tax
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