January’s inflation figure is likely to slow down the Bank of England’s delivery of interest rate cuts as inflation remains well above the central bank’s government-set target.
UK inflation hit a 10-month high in January, reaching 3% and up from 2.5% on December, according to official figures from the Office for National Statistics (ONS). That was above analyst expectations for 2.8%.
The higher-than-expected rise is likely to dampen hopes of a speeding up of interest rate cuts by the Bank of England.
The spike, which took inflation further above the bank’s target of 2%, was largely due to increases in airfares, food casts and private school fees in the wake of the Labour government’s decision to impose an additional tax on private schools.
Scale of rise surprises
Economists had anticipated an increase to 2.8% but the scale of the spike has come as a big surprise and is likely to cause concern among rate-setters at the central bank at a time when they are voicing worries about about the UK’s tepid economic growth.
Earlier this month, the bank cut its main interest rate by a quarter of a percentage point to 4.5%, its third reduction in six months, as it halved its 2025 growth forecast for the UK to 0.75%.
If growth remains modest, it will be disappointing news for the government, which has stressed the importance of growth. With growth proving elusive, the party’s popularity has fallen sharply since its election victory in July.
Most economists predict inflation will rise further in the coming months as a result of higher domestic energy bills but start to fall in the second half of the year, which will give policymakers room to cut interest rates again – but maybe not as much or as often as previously thought.
“Another rate cut in March looks pretty unlikely, with the bank continuing with its gradual pace of easing for now,” said Luke Bartholomew, deputy chief economist at abrdn, formerly Aberdeen Asset Management. “But any speeding up of the pace of rate cuts in the second half of the year will depend on inflation pressures heading back towards 2%.”
Rise represents ‘a real cause for concern’
Nick Saunders, the chief executive officer (CEO) of stock trading platform Webull UK, said in an email note: “With interest rates trickling down, the sharp uptick in the inflation rate demonstrates the tightrope the Bank is walking. While food prices and wholesale energy costs are keeping the headline rate down, the 3% figure is a real cause for concern while the core inflation rate hints at an unfavourable longer term prognosis.
“Lower mortgage rates and food costs are felt immediately, a sense of relief here belies choppier waters in the wider economy. The Chancellor has had some good news with recent figures, but inflation at 3% is worrying.”
David Morrison, senior market analyst at fintech and financial services provider Trade Nation, also said in an email note: “This was an unexpectedly large jump in both the Headline and Core numbers. The ONS says that the biggest contributors to the increases were transportation, food and beverages costs. Sterling shot higher initially, but quickly gave up these gains and is now little-changed this morning.
“Today’s hotter-than-expected numbers will make it harder for the Bank of England to cut rates further. But markets have been expecting a pause in monetary easing following the Bank’s 25 basis point cut earlier this month. So, now it’s a question of how long that pause may be, and can we expect inflation to continue to trend higher from here?”
Heading in the ‘wrong direction’
Laith Khalaf, head of investment analysis at AJ Bell, said in an email note: “Inflation is now 1% away from target and heading in the wrong direction, and consumers better buckle up for prices to trend higher throughout this year.
“The Bank of England reckons inflation will hit 3.7% in the third quarter, and that’s without a potential tariff shock stemming from US trade policy. The chancellor’s decision to raise National Insurance and the National Living Wage from April will no doubt feed into the inflationary dynamic. A survey conducted by the CIPD found that 42% of affected employers intended to raise prices to offset higher costs.
“As well as feeding through into rising prices, higher rates of National Insurance are also expected to put pressure on head counts as businesses adjust to the increased costs of employing staff, which will also serve to dampen demand. Meanwhile the Bank’s central forecasts show inflation falling back to 2% in the medium term based on rate expectations. However those expectations were measured in January, when global inflation fears drove yields and rates higher.”
