The United Kingdom's inflation rate climbed to 3% in January, surpassing analyst expectations, according to the Office for National Statistics. Economists surveyed by Reuters had anticipated a 2.8% reading. This increase follows a lower-than-expected consumer price index (CPI) of 2.5% in December. The rise in inflation is attributed to higher global energy costs and regulated price changes, marking a significant uptick from the more than three-year low of 1.7% seen in September.
The Bank of England (BOE) has responded by making its first interest rate cut of the year in February, reducing the benchmark rate to 4.5%. The central bank has also signaled further rate trims are on the horizon as it navigates the economic impacts of fluctuating inflation and growth forecasts. The BOE has reduced the U.K.'s economic growth forecast from 1.5% to 0.75% for this year.
Increased monthly prices since September have been driven by rising fuel costs and faster-growing service fees compared to goods prices. Higher global energy costs are projected to push headline inflation to 3.7% in the third quarter of 2025. Despite these pressures, core price growth continued to slow in December.
The BOE remains optimistic about the future, stating that "even as underlying domestic inflationary pressures are expected to wane further." Looking ahead, the central bank predicts that inflation will return to its 2% target by 2027.