UK Inflation Drops to 3.0%, Boosting Prospects for BoE Rate Cut

UK Inflation Trends and Economic Implications

By Suban Abdulla and William Schomberg

Current Inflation Rates

LONDON, Feb 18 (Reuters) - British inflation fell to its lowest since March last year, according to official data that strengthened the case for an interest rate cut soon by the Bank of England, even as a measure of underlying price pressures remained strong.

Impact on Interest Rates

Consumer prices rose by 3.0% in annual terms in January, slowing from a 3.4% increase in December, the Office for National Statistics said, as transport, food and non-alcoholic drink prices rose less quickly.

Underlying Economic Pressures

Most economists polled by Reuters had expected headline inflation to drop to 3.0% in January. The BoE projected earlier this month that it would ease to 2.9% before a bigger fall in April to almost the central bank's 2% target.

Food inflation - which the central bank sees as key for shaping public expectations about prices more broadly - was the weakest since April last year. Airline fares fell sharply on the month after jumping in December.

Core inflation, excluding energy, food and tobacco prices, rose by 3.1% in January, its lowest rate since September 2021.

Sterling was little changed against the U.S. dollar after the ONS data. Interest rate futures put an almost 80% chance on a March rate cut by the BoE followed by another in late 2026.

UNDERLYING PRICE PRESSURES PERSIST

There remained some warning signs for the BoE in Wednesday's data.

Inflation for services - closely watched as a gauge of domestic price pressures - slowed only marginally to 4.4% from 4.5% in December, above the Reuters poll expectations for a fall to 4.3%.

"Given almost all the survey measures of prices suggest disinflation has slowed, the MPC will still have to be cautious this year, even as headline inflation drops," Thomas Pugh, chief economist at accountancy firm RSM UK, said.

"Indeed, services inflation is proving to be much stickier than headline inflation."

British inflation has run higher than in the United States and in the euro zone where it stood at 2.4% and 1.7% respectively in January.

The BoE expects the pace of price rises to slow sharply to almost its 2% target in April as last year's rises in utility costs and other government-controlled tariffs fall out of the annual comparison.

Investors mostly expect the central bank to cut its benchmark interest rate to 3.5% in March after a tight vote to keep borrowing costs on hold in February. However, some policymakers remain worried about underlying inflation pressures.

ONS data last week painted a downbeat picture of Britain's economy at the end of 2025 with output barely growing. Figures released on Tuesday showed the labour market was still losing jobs although there were some signs of a stabilisation.

(Reporting by Suban Abdulla; Editing by William Schomberg and Toby Chopra)