Key Highlights
- Inflation falls to 3% in January, down from a high of over 11% in October 2022.
- Economists predict inflation may drop to the government target of 2% by April.
- The Bank of England is expected to cut interest rates to 3.5% in March.
- Rachel Reeves, Chancellor of the Exchequer, prioritizes cutting the cost of living.
UK Inflation Plummets: A Glint of Hope for Homeowners and Savers?
In January 2026, UK inflation tumbled to its lowest level in nearly a year, marking a significant shift from the peak of over 11% seen just last October. This marked the economy’s return to a more manageable pace of price growth.
While this news may bring a sigh of relief among consumers facing rising household bills, it also means that interest rates could see a reduction in March. The Bank of England is anticipated to cut rates from 4% to 3.5%, which would be widely welcomed by homeowners who are already grappling with higher mortgage costs.
Chancellor’s Priority: Cutting the Cost of Living
Speaking on the latest Office for National Statistics (ONS) data, Chancellor Rachel Reeves stated that cutting the cost of living is her ‘number one priority.’ Her government has introduced several measures to address this, including £150 off energy bills and a freeze in rail fares for the first time in 30 years. These actions aim not only to ease inflationary pressures but also to provide some financial relief to households.
However, the impact of these policies is slowly trickling through, and the government faces an uphill battle to fully alleviate the cost burden on citizens. The reduction in fuel prices has been a key factor in bringing down overall CPI, with petrol prices dropping by 3.1 pence per litre between December 2025 and January 2026.
Businesses Face Their Own Challenges
The slowdown in inflation does not come without its caveats for businesses. Dr Liliana Danila from the Food and Drink Federation warned that businesses across the supply chain have had their margins eroded, making them particularly vulnerable to supply chain shocks. To stabilize food inflation in the long term and protect shoppers from future price spikes, she urged the government to incentivize investment in business resilience.
Stuart Morrison of the British Chambers of Commerce echoed these sentiments, emphasizing that while the headline CPI numbers are encouraging, businesses continue to face significant price pressures.
These pressures have been squeezing their confidence, stalling investments, and holding back recruitment. He called for action from the government to ease inflation alongside cutting the cost of doing business, including reforms in business rates and reducing energy costs.
What It Means for Savers and Homeowners
For consumers, the focus now should be on ensuring household finances are in order. According to Holly Mackay from Boring Money, the direction is clear: interest rates are likely to come down as we head into summer, making it a good time for savers to move their cash to better rates. Homeowners coming off fixed-rate mortgages should shop around and avoid passively accepting their lender’s Standard Variable Rate at the end of a fixed term.
However, it’s important not to get too complacent.
Slower inflation also means less growth and a difficult jobs market. As employers seek to keep costs low, individuals should build a cash buffer—ideally three months’ income—to cushion them in case of redundancy.
In conclusion, while the reduction in inflation is undoubtedly positive news for many, it’s crucial to understand that this is just one part of the economic puzzle. The government and businesses still face significant challenges ahead, but the signs are promising for a more stable economy moving forward.
