The slowdown was largely driven by falling airfares, petrol and food prices, although higher costs for hotels and takeaway meals limited the overall drop.
The inflation data followed labour market figures earlier in the week showing unemployment had climbed to 5.2 per cent , a five-year high with youth unemployment rising at its fastest pace in more than a decade.
The combination of cooling inflation, weak economic growth and rising joblessness has fuelled market expectations that the Bank of England could cut interest rates from 3.75 per cent to 3.5 per cent at its next meeting on March 19. Rates were reduced four times in 2025.
Grant Fitzner, chief economist at the ONS, said inflation fell markedly in January, partly due to lower petrol prices and a reversal in December’s spike in airfares. He added that cheaper bread, cereals and meat also contributed, though hotel stays and takeaway prices pushed in the opposite direction.
Chancellor Rachel Reeves said reducing the cost of living remains her top priority. Measures outlined in her November Budget; including removing certain green levies from energy bills and freezing rail fares for the first time in three decades are expected to help bring inflation back to the 2 per cent target in the spring.
At its last meeting, members of the Bank’s Monetary Policy Committee voted narrowly to hold rates steady, but Governor Andrew Bailey indicated there was scope for cuts this year if inflation continues to fall as projected.
Yael Selfin, chief economist at KPMG UK, said the sharper-than-expected drop in inflation “paves the path for a March interest rate cut” and suggested there could be three reductions over the course of the year.
Food inflation slowed to 3.6 per cent in January from 4.5 per cent in December, its lowest level since last April. Services inflation edged down to 4.4 per cent, while core inflation which excludes volatile items dipped to 3.1 per cent.
In currency markets, the pound slipped 0.06 per cent against the dollar to $1.35, while yields on the benchmark ten-year UK government bond fell to 4.38 per cent, their lowest level in around a month.
