Fuel price drop sees UK inflation fall to lowest level since March 2025 in boost to interest rate cut expectations
Inflation in the UK has fallen to its lowest level in almost a year after falling prices for airline tickets, oil and food; This paved the way for a cut in interest rates next month.
While official figures show inflation fell to 3 percent in January, economists predict inflation is on track to fall to the government’s 2 percent target by April.
The decline in the Consumer Price Index (CPI) indicates a return to the gradual downward trend seen at the end of last year, following the surprise increase to 3.4 percent in December.
together with rising unemployment and slowing wage growth Given the data released this week, as well as the ever-weakening economy, the decline is expected to lead the Bank of England (BoE) to cut interest rates to 3.5 percent when its Monetary Policy Committee meets to vote on March 19. A cut in the interest rate would be widely seen as a boost for homeowners.
The slowdown, which means prices are not rising as quickly as before, will provide some relief for the chancellor amid the Bank of England’s efforts to bring inflation back to its target level.
Responding to the latest data from the Office for National Statistics (ONS), Rachel Reeves said “lowering the cost of living is my number one priority”.
“Thanks to the choices we have made in the budget, we are reducing inflation with a £150 cut on energy bills, a freeze on rail charges for the first time in 30 years and a re-freeze on prescription charges,” he added.
Inflation, the rate at which prices of goods and services in an economy increase over a period of time, rose above 11 percent in October 2022.
It returned to more manageable levels last year, but the pace was slower than businesses and households desired, causing interest rates to remain high for longer.
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Higher interest rates can help reduce inflation, while lower interest rates can help stimulate a stagnant economy.
Falling household bills and the lowering of the energy price cap in April are expected to contribute to bringing CPI inflation back to 2 percent by spring. Food inflation, which contributed greatly to high inflation last year, is also expected to slow down.
In addition to the decrease in clothing and shoe costs in January, the decrease in restaurant and hotel, transportation and furniture costs also contributed to the general decrease in inflation. However, there were significant increases in the alcohol and tobacco, education and health sectors.
Motor fuels had the biggest downward impact on month-to-month costs, with the average petrol price falling by 3.1p per liter between December 2025 and January this year, the ONS says.
Food and Beverage Federation’s chief economist Dr. Liliana Danila warned the government to take immediate action to prevent major increases in prices again.
“After years of rising costs, margins for businesses in the supply chain have eroded, making manufacturers particularly susceptible to supply chain shocks caused by geopolitics or climate change,” Dr Danila said.
“To stabilize food inflation over the long term and protect shoppers from future price rises, the government needs to encourage investment in business resilience.”
British Chambers of Commerce have called for better investment in businesses to keep the economy thriving, especially in light of rising unemployment.
“CPI may be at its lowest level in almost a year, but this headline figure is only part of the story. Inflation concerns among businesses remain,” BCC research director Stuart Morrison said. “Businesses face huge price pressures that are damaging confidence, stalling investment and hindering hiring.
“Firms are clear: Lowering inflation must be matched with actions to reduce the cost of doing business. This should include reforming business rates, reducing energy costs and making exports cheaper. Only then will businesses be able to fully accelerate economic growth.”
Meanwhile, Holly Mackay, founder of Boring Money, reminded savers that they should move their cash to the best rates now, especially if they want to lock in higher rates ahead of a potential upcoming cut.
“The direction of travel is down, which means mortgages are likely to fall as we head into the summer, and those with cash savings accounts really need to shop around now and consider locking in a fixed rate if possible,” he said.
For consumers, the focus must now be on ensuring household finances are in order ahead of interest rate cuts later this year, amid a worrying employment market and a still-sluggish economy.
“Slower inflation also comes with less growth and a tough job market. As employers look to keep costs down, we all need to make sure we build up a cash buffer (ideally at least three months’ income) to cushion us in the event of redundancies,” Ms Mackay added.
“Homeowners taking out fixed-rate mortgages should do their research. It’s almost always a bad idea to passively accept your lender’s Standard Variable Rate offered over a fixed term, so contacting an independent mortgage broker is a sensible move.”
Creditspring consumer finance expert Tamsin Powell warned that it was important to remember that slowing inflation does not mean lower prices, it just means they are climbing at a lower rate than before.
“For families watching every pound, even small slowdowns in food and energy price increases make a difference,” he said. “But it’s important to keep this in perspective. Prices are not returning to their previous levels; they are just rising more slowly.”
