INFLATION dropped to 3% in the UK in January – but experts warned that “the economy is still in a mess”. Though they now expect the Bank of England to continue cutting its base rate which is “good news for borrowers”.
In some rare good news for the UK economy, the Consumer Prices Index (CPI) rose by 3% in the 12 months to January 2026, down from 3.4% in the 12 months to December 2025, Office for National Statistics revealed today.
On a monthly basis, CPI fell by 0.5% in January 2026, compared with a fall of 0.1% in January 2025.
In December, inflation had edged up unexpectedly from 3.2% to 3.4% – but it is now on its way towards the Bank of England’s target of 2%.
In January, transport, food and non-alcoholic beverages made the largest downward contributions to the monthly change in CPI annual rates.
Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 3.1% in the 12 months to January 2026, down from 3.2% in the 12 months to December 2025. The CPI goods annual rate fell from 2.2% to 1.6%, while the CPI services annual rate fell from 4.5% to 4.4%.
This comes after it was revealed yesterday that unemployment rose to 5.2% in the UK.
Savers can benefit
Grant Fitzner, Chief Economist, ONS, said: “Inflation fell markedly in January to its lowest annual rate since March last year, driven partly by a decrease in petrol prices.
“Airfares were another downward driver this month with prices dropping back following the increase in December. Lower food prices also helped push the rate down, particularly for bread and cereals and meat. These were partially offset by the cost of hotel stays and takeaways.”
Caitlyn Eastell, Personal Finance Analyst at Moneyfactscompare.co.uk, said the Moneyfacts Average Savings Rate currently sits at 3.31%, which is higher than inflation, so savers can get real returns on their cash but it’s still important to shop around for the best rates.
She added: “Savers have lost almost £1,200 on average in real terms over the past five years, despite savings rates hitting post-2008 highs, as inflation surged to over 40-year peaks and ate away at the value of cash savings.
“While the top non-ISA savings accounts currently boast higher headline rates, the tax-free interest offered by cash ISAs could leave many savers even better off in real terms, particularly those at risk of breaching their Personal Savings Allowance.
“However, with inflation set to cool, savers could soon choose from a larger pool of products that offer inflation-busting returns even with potential base rate cuts looming because inflation is falling faster than savings rates.”
Welcome news – but it needs context
Rohit Kohli, Director at Romsey-based The Mortgage Stop, said, taken within context, the inflation figure isn’t as rosy as it seems.
He added: “Inflation has fallen to 3%, down from 3.4%, and on a monthly basis CPI dropped by 0.5% in January. Core inflation has also edged lower, suggesting underlying price pressures are easing rather than simply shifting between categories. That is welcome news. But it needs context.
“Growth through Q4 was flat at best. Unemployment has climbed to 5.2%. Business confidence remains weak. Inflation is cooling, but so is the wider economy. Ministers will almost certainly present this as proof their plan is working. If that is the case, they also need to accept ownership of the rest of the data set.
“You cannot highlight falling inflation while downplaying stalled growth, rising unemployment and weak confidence. Economic management is judged on the full picture, not selective headlines. For the Bank of England, this strengthens the case for a rate cut in March. The question now is whether a cautious 0.25% move is enough given the pace of economic slowdown.”
Taryn Lee Johnston, Owner at Lincoln-based The FCM Group, said the publishing industry has been particularly hit by inflation.
She continued: “Anyone who writes for a living will be thrilled to read this news. Within the publishing sector, everything has risen in price, from ink, paper and distribution costs, but the only thing that hasn’t is the price of books.
“This makes it very hard for both publishers and authors to see a financial return on the weeks or months of work put into their books. The sector has been swimming upstream for a long time now but this drop in inflation may see some degree of normality resume if inflation continues to shift back to target.”
The economy is still in a mess
David Belle, Founder and Trader at Fink Money, said small businesses are being crippled by inflation.
He added: “Inflation dropping to 3% will trigger high fives on Downing Street but let’s not kid ourselves, the economy is still in a mess. What’s crippling is that the tax bands have been frozen while inflation has surged.
“For small businesses, the employers’ National Insurance and minimum wage rises have been economic suicide. Then there’s the business rates increases. If you were to model out the worst structure for an economy, you would have the UK’s right now. Inflation dropping is a positive but the wider fiscal backdrop remains fundamentally flawed.”
Riz Malik, Director at Southend-on-Sea-based R3 Wealth, said he now expects the Bank of England to continue cutting its base rate.
He continued: “Falling inflation with rising unemployment should give the Bank of England the confidence to continue their rate cutting cycle. Good news for borrowers – not so good news for savers.”
Good news
Philly Ponniah, Chartered Wealth Manager and Financial Coach at Philly Financial, said the 3% figure is good news.
She added: “This is the first bit of good news we’ve had in a while. Inflation is simply how quickly prices rise over time, and while 3% still means things are getting more expensive, it is happening more slowly than before. Moving down from 3.4% to 3% might not sound dramatic, but for businesses and families it eases some of the pressure on everyday spending.
“It helps that petrol, food and flights became cheaper in January, since these are regular costs for most households and many businesses. When those fall, people have a little more breathing room and companies feel less squeezed.
“The 0.5% monthly drop matters more because it shows prices are easing right now, not just looking better compared to a high point last year. Annual figures can fall because of past spikes dropping out of the data, but a real month to month decline suggests pressure is genuinely cooling. It does not mean everything is fixed in the economy but things are improving.”
