UK inflation has hit its lowest point in nearly a year, and the Bank of England is quietly warming up the rate-cutting machinery. Here’s what the latest figures mean for your money.
January’s CPI reading came in at 3.0% — down from 3.4% in December and the lowest since March 2025, per the Office for National Statistics. Cheaper petrol, falling airfares, and softer food prices all did the heavy lifting. And with the labour market cooling too, a March rate cut is looking increasingly likely.
What Dragged Inflation Lower?
The ONS’s chief economist Grant Fitzner pointed to a fall of 3.1p per litre in petrol prices as a key driver. Airfares also pulled back after their usual December spike, while bread, cereals, and meat all got a little cheaper at the checkout.
Not a dramatic collapse in prices — but a steady, broad-based easing that policymakers will welcome.
The One Number the Bank of England Really Watches
Services inflation — the metric the Bank uses as a proxy for homegrown price pressure — edged down to 4.4% from 4.5%. That’s a move in the right direction, but slightly stickier than some forecasters expected.
Does that put a March cut in doubt? Probably not. Most analysts reckon the Bank will look past the modest services surprise, particularly given Tuesday’s labour market data showing unemployment rising to 5.2% — its highest level since 2021 — and wage growth cooling noticeably.
As Luke Bartholomew, deputy chief economist at Aberdeen, put it: policymakers are likely to “look through any short run stickiness in the services data” given the broader picture.
When Will Inflation Hit the 2% Target?
The Bank of England expects inflation to return to its 2% target this spring, driven largely by lower energy prices. That would clear the runway for further rate cuts through 2026.
Jonathan Raymond at Quilter Cheviot summed it up neatly: with growth barely positive at the end of last year and the labour market softening, the Bank “will likely feel increasingly comfortable cutting rates as 2026 progresses.”
What the Government Is Saying
Chancellor Rachel Reeves was quick to claim credit, pointing to Budget measures including £150 off energy bills, the first rail fare freeze in 30 years, and another prescription fee freeze as reasons inflation is heading in the right direction.
Whether you credit the Budget or broader macro forces, the direction of travel is the same — down.
What This Means for You
Lower inflation and potential rate cuts are good news if you’re on a variable mortgage or looking to borrow. Savers, on the other hand, may want to lock in competitive fixed rates before they start to slide. Either way, keep an eye on the Bank of England’s March meeting — it could be a significant moment for UK borrowing costs.
FAQ
Q1: Will the Bank of England cut interest rates in March 2025?
A: It’s looking increasingly likely. With inflation falling and the labour market weakening, most analysts expect the Bank to cut in March — though any surprise in services inflation could give policymakers brief pause.
Q2: Why did UK inflation fall in January?
A: The drop was driven by cheaper petrol, lower airfares after the December spike, and falling food prices — particularly bread, cereals, and meat.
Q3: What is services inflation and why does it matter?
A: Services inflation measures price rises in sectors like hospitality, education, and finance. The Bank of England watches it closely as a signal of domestic price pressure — it’s harder to shift than goods inflation, which is why its stickiness gets so much attention.
Q4: When will UK inflation return to 2%?
A: The Bank of England forecasts a return to its 2% target this spring, largely off the back of lower energy prices.
Q5: How does falling inflation affect mortgage rates?
A: Falling inflation increases the likelihood of Bank of England rate cuts, which typically feed through to lower variable and tracker mortgage rates over time.
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Effective Date: 15th July 2025
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