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Inflation to fall again – what does this mean for interest rates? - INDEPENDENT
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Inflation is expected to fall back to its lowest level for nearly a year in Wednesday’s official figures for January in a boost to interest rate cut hopes.
Most economists, including Pantheon Macroeconomics, forecast Office for National Statistics (ONS) data will reveal Consumer Prices Index (CPI) inflation fell back sharply to 3% in January, down from 3.4% in December.
This would mark the lowest rate since March 2025.
The anticipated decline is set to come on the back of lower airfares, food and energy price inflation in January.
These figures are likely to reinforce expectations of another interest rate cut, possibly as soon as next month.
Disappointing growth figures for the final quarter of last year have added to forecasts for a rate cut in March, to 3.5% from 3.75% currently.
The ONS said gross domestic product (GDP) eked a meagre growth of 0.1% in the fourth quarter of 2025, leaving the out-turn for the year as a whole at a worse-than-expected 1.3% expansion.
Official figures on Tuesday showing wage growth fell back once again to is lowest level for almost four years, to 4.2% in the three months to December, have also boosted the argument for a reduction.
But Bank of England chief economist Huw Pill said at a Santander event on Friday that he thought rates were already “a little bit too low”, suggesting he would not be among those voting for a reduction next month.
Mr Pill voted as part of the 5-4 majority on the Bank’s Monetary Policy Committee to keep interest rates on hold at 3.75% earlier this month.
The Bank is forecasting that inflation will fall to its 2% target by the middle of the year, as measures announced in the Chancellor’s autumn budget will help to slow inflation, particularly a package of support to bring down household energy bills from April.
For the latest data, Pantheon is expecting a steep drop “as energy, airfares, education and food price inflation all slow”.
Pantheon experts said airfares are set to have dropped by nearly a quarter last month, having soared in December as increased demand for travel over the festive period fuelled price hikes.
Though it believes inflation will be 3% – a touch higher than the Bank of England’s 2.9% prediction.
Investec Economics economist Ellie Henderson said food price growth is also likely to have dropped to 4.2%, below November’s level, but warned there was a risk that food inflation was still a “key concern”.
She added that inflation may also be pushed lower by VAT on private school fees falling out of the annual comparison, as well as “some heavier discounting than usual by retailers”.
She said: “An additional small source of downward pressure on the annual rate looks to have come from utility prices.
“There was a near-5% rise in electricity prices on the month as per the energy price cap, but this was countered by a fall in gas prices.
“In total, the energy price cap increased by just 0.2% in January, smaller than the 1.2% increase in January 2025.”
The inflation figures come in a busy week for official UK economic statistics, with data for government borrowing and retail figures also due on Friday.
