Boost for Rachel Reeves as inflation drops to 10-month low
UK inflation has fallen to its lowest since March last year due to a drop in petrol, food and airfare prices.
The drop has raised the likelihood that the Bank of England will cut interest rates next month, with economists predicting that inflation is on track to drop to target levels by April.
The rate of Consumer Prices Index (CPI) inflation decreased to 3 per cent in January from 3.4 per cent in December, the Office for National Statistics (ONS) said.
The reading was in line with analyst predictions and puts inflation back on a downward trajectory after an increase in the previous month.
The inflation slowdown will provide some relief for the Chancellor Rachel Reeves, amid efforts by the Bank of England to bring inflation back to the target level of 2 per cent.
Ms Reeves said: “Cutting the cost of living is my number one priority.
“Thanks to the choices we made at the budget we are bringing inflation down, with £150 off energy bills, a freeze in rail fares for the first time in 30 years and prescription fees frozen again.
“Our economic plan is the right one, to cut the cost of living, cut the national debt and create the conditions for growth and investment in every part of the country.”
Economists said that the latest reading has lifted hopes that central bankers will cut interest rates next month from their current rate of 3.75 per cent, with expectations that a further cut could take place later this year.
Thomas Pugh, chief economist at RSM UK said: “The sharp drop in inflation in January all but nails on a rate cut next month following yesterday’s weak labour market data.
“What’s more, today’s drop was just the start of a steep slide that should take inflation to 2 per cent in April, which will set the stage for another interest rate cut in the summer.”
Rob Wood, chief UK economist at Pantheon Macroeconomics, said a March rate cut is “highly likely” following the inflation fall and increase in unemployment.
ONS chief economist Grant Fitzner said: “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 & cereals and meat. These were partially offset by the cost of hotel stays and takeaways.”
This comes with household energy bills set to fall by 7 per cent when the cap is next updated in April thanks to Government measures announced in the Budget.
Cornwall Insight has predicted Ofgem will reduce the energy price cap by £117 to £1,641 a year for a typical dual fuel household from April 1.
This is slightly lower than its previous prediction for an 8 per cent, or £138, reduction. Ofgem will announce its next price cap level by February 25 for the three months from April 1 to June 30.
Ms Reeves said last November that £150 would be cut from the average household bill from April by scrapping the Energy Company Obligation (Eco) scheme introduced by the Tories in government.
But Cornwall Insight said the changes would reduce the cap by about £145 a year once VAT and pricing allowances within the cap methodology are taken into account.