Big-Picture Snapshot

Drivers this month

• Energy prices: -0.16pp
• Food and non-alcoholic beverages: -0.12pp
• Transport: -0.09pp
• Clothing and footwear: -0.07pp
• Recreation and culture: -0.04pp

Policy pulse

January’s -0.5% reading sits well below the Bank of England’s 2% YoY inflation target. The sharp monthly decline underscores ongoing disinflationary pressures, with headline CPI momentum now negative for the first time since December 2023.

Market lens

Gilts rallied sharply on the print, with yields falling across the curve. Sterling weakened against major peers as traders recalibrated rate expectations. The outsized drop in monthly inflation has prompted renewed debate over the timing of potential monetary easing.

Foundational Indicators

Recent trend

• January 2026: -0.5%
• December 2025: 0.4%
• November 2025: -0.2%
• 12-month average: 0.1%
• Lowest since: December 2023

Historical comparisons

January’s figure is the largest monthly decline since December 2023. Over the past three months, inflation has swung from -0.2% in November to 0.4% in December, before plunging to -0.5% in January. The 12-month average remains positive, but the latest reading pulls the trend lower.

Data source and methodology

Figures are sourced from the UK Office for National Statistics and cross-verified with the Sigmanomics database[1]. The MoM inflation rate reflects the percentage change in the Consumer Price Index from the previous month, seasonally adjusted.

Chart Dynamics

Forward Outlook

Scenario analysis

• Bullish (20–30%): Energy prices stabilize, core inflation firms, and MoM readings return to positive territory by March.
• Base case (50–60%): Inflation remains subdued, with MoM readings hovering near zero as disinflation persists through Q1.
• Bearish (15–25%): Further declines in energy and consumer demand push MoM inflation deeper into negative territory, risking outright deflation.

Risks and catalysts

Upside risks include supply chain disruptions and commodity price rebounds. Downside risks stem from weak retail sales and ongoing declines in wholesale energy costs. The Bank of England’s next moves will hinge on whether this disinflation proves transitory or persistent.

Closing Thoughts

Market lens

Financial markets responded swiftly to the downside surprise in inflation. Gilts rallied, and the pound lost ground against the euro and dollar. The sharp drop in monthly inflation has shifted the policy debate, with investors now watching upcoming data for confirmation of a sustained disinflationary trend.