Big-Picture Snapshot

Drivers this month

• Core goods: -0.12pp
• Energy: -0.09pp
• Services: +0.07pp
• Food: -0.04pp

Policy pulse

The 3.0% YoY inflation rate remains above the Bank of England’s 2% target. The gap narrowed from December’s 1.4 percentage point overshoot to 1.0 point in January. Policymakers continue to stress vigilance as services inflation persists.

Market lens

Foundational Indicators

Historical context

January’s 3.0% inflation rate is the lowest since April 2025, when the figure stood at 2.6%. The 12-month average from February 2025 to January 2026 is 3.32%. Inflation peaked at 3.8% between August and October 2025, then eased to 3.6% in November and 3.2% in December. The current reading is 0.8 percentage points below the recent high and 0.4 points lower than the prior month.

Methodology

The headline figure is based on the Consumer Prices Index (CPI), calculated by the Office for National Statistics. The index tracks a basket of goods and services, weighted by household consumption patterns. The YoY rate compares January 2026 prices to those in January 2025, ensuring seasonal effects are minimized.

Scenario probabilities

• Bullish (inflation below 2.5% by Q2): 20–30%
• Base (inflation remains 2.5–3.2%): 50–60%
• Bearish (reacceleration above 3.5%): 10–20%

Chart Dynamics

Forward Outlook

Risks and catalysts

• Upside: Services inflation, wage growth
• Downside: Energy base effects, goods deflation
• Wildcards: Global commodity shocks, fiscal policy shifts

Policy pulse

The Bank of England’s 2% target remains elusive, but the narrowing gap gives policymakers more flexibility. The Monetary Policy Committee has signaled data-dependence, with a focus on services and wage trends.

Market lens

Closing Thoughts

Key takeaways

• Inflation slowed to 3.0% in January, the lowest since April 2025.
• Disinflation is broad-based, but services inflation is still sticky.
• Markets responded positively, with gilts rallying and sterling steady.
• The Bank of England’s 2% target remains a challenge, but the trend is encouraging.

Scenario wrap

Most analysts see inflation holding near current levels in the coming months, with risks balanced between persistent services inflation and further goods price declines. The next few data releases will be critical for policy direction and market sentiment.