Positive news was released by the Office for National Statistics (ONS) with the latest announcement that inflation has fallen to 3%. This figure had been anticipated by economists and it’s now at its lowest level since March 2025.
What has caused the drop in inflation?
Motor fuel prices have partly contributed to the fall in inflation. Between December 2025 and January 2026, the average price of petrol fell by 3.1p per litre. Diesel prices also dropped, with a fall of 3.2p per litre.
Airfare prices also dropped following their increase in December. Food prices have come down, too, especially for bread, cereals and meat. Annual food inflation has dropped from 4.5% to 3.6%. The cost of hotel stays and takeaways partially offset these.
As the inflation rate falls, what does this mean for interest rates?
The unexpected jump in inflation in the year to December to 3.4% had correctly been explained as a temporary trend by analysts due to the timing issues that affected the rate. Now, as the rate has dropped to 3%, it sits just 1% higher than the Bank of England’s (BoE) target rate of 2%. The BoE expects inflation to hit its 2% target in April, especially with the cuts in energy bills following the Autumn Budget.
With this latest inflation rate figure and a softening labour market, there are fresh hopes of an interest rate cut in March. The base rate currently stands at 3.75% and a cut of 0.25% following its review on 19th March is now predicted. This would bring the rate down to 3.5%, with a further cut expected later in the year.
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