Inflation – January 2026

Inflation – January 2026 At a glance

Inflation has eased again at the start of the year, with the Consumer Prices Index (CPI) falling to 3.0% in the 12 months to January 2026. That’s down from 3.4% in December and marks the lowest annual rate since March 2025.

While inflation is still above the Bank of England’s 2% target, the overall direction is now downward. Prices also fell month-on-month, which is another sign that some of the pressure on household budgets is beginning to ease.

Key points at a glance

• CPI rose by 3.0% in the 12 months to January 2026, down from 3.4% in December.
• On a monthly basis, CPI fell by 0.5% in January, compared with a 0.1% fall a year ago.
• Transport and food were the biggest drivers behind the drop in inflation.
• Core CPI, which strips out food and energy, fell slightly to 3.1%.
• Housing and household services continue to make the largest contribution to overall inflation.

What’s driving the drop in inflation?

The fall from 3.4% to 3.0% reflects lower price pressures across several key areas. Six divisions pushed inflation down, while four pushed it up.

The biggest downward contributions came from:

• Transport
• Food and non-alcoholic beverages
• Education

Transport

Transport made the largest downward impact on inflation in January.

Prices in this category rose by 2.7% over the year to January, down from 4.0% in December. On a monthly basis, transport costs fell by 1.8%, compared with a 0.5% fall at the same time last year.

Motor fuel prices were a major factor.

• Petrol prices fell by 3.1p per litre between December and January.
• The average petrol price now stands at 133.2p per litre, down from 137.1p a year ago.
• Diesel prices fell by 3.2p per litre in January.

Overall, motor fuel prices fell by 2.2% over the year to January, compared with a rise of 0.9% the previous month.

Air fares also played a role. Prices typically rise in December and fall in January, but this year the drop was more pronounced than last year. That sharper fall helped bring the annual inflation rate down further.

For you, this means some relief in travel and fuel costs compared with recent months, although prices remain higher than they were a few years ago.

Food and non-alcoholic beverages

Food inflation also eased. Food and non-alcoholic beverage prices rose by 3.6% in the year to January, down from 4.5% in December. On a monthly basis, prices actually fell by 0.1%, compared with a 0.9% rise in January last year.

Several food categories contributed to this slowdown, including: bread and cereals, meat, milk, cheese and eggs, soft drinks, coffee and tea.

This is a positive sign, as food costs have been one of the biggest pressures on your household budget in recent years. While prices are still higher than a year ago, the pace of increase is clearly slowing.

Education

Education inflation dropped sharply to 5.1%, down from 7.6% in December.

This change was largely linked to private school fees, which rose significantly last year after becoming subject to VAT. With no similar increase this January, the annual rate has naturally eased.

Housing and household services

Although inflation has fallen overall, housing and household services remain the largest contributor to the CPI rate.

Prices in this category rose by 4.5% over the year to January, down from 4.9% in December. On a monthly basis, prices increased by 0.5%.

Electricity prices rose by 5.3% over the year, reflecting the latest energy price cap adjustment. Gas prices, however, fell by 2.7% over the same period.

While housing inflation is easing slightly, it continues to have a significant impact on your overall cost of living. This is especially relevant if you are renting or managing household bills alongside a mortgage.

Goods vs services

Breaking the numbers down further:

• Goods inflation fell to 1.6%, down from 2.2% in December.
• Services inflation eased slightly to 4.4%, from 4.5%.

Goods inflation has slowed more noticeably, helped by falling energy and fuel prices. Services inflation remains higher, reflecting ongoing costs in areas such as hospitality and personal services.

Core inflation

Core CPI, which excludes energy, food, alcohol and tobacco, rose by 3.1% in the year to January. That’s down slightly from 3.2% in December and is the lowest rate since September 2021.

Core inflation is important because it gives a clearer view of underlying price pressures. The fact that it is gradually easing suggests inflation is not just falling because of energy prices, but across a broader range of sectors.

How inflation compares internationally

At 3.0%, inflation remains higher than in some comparable economies.

In January:

• Germany recorded inflation of 2.1%.
• France recorded inflation of 0.4%.

The gap shows that while progress has been made, inflation here is still relatively elevated compared with some neighbouring countries.

What this means for interest rates

Inflation falling to 3.0% strengthens the case for potential interest rate cuts later this year, but it does not guarantee them.

The Bank of England’s target remains 2%. While inflation is moving in the right direction, it is still above that level.

Policymakers will want to see:

• Continued easing in services inflation
• Further moderation in core CPI
• Stability in energy and housing costs

If inflation continues to trend down over the next few months, pressure for a rate cut will build. However, any changes are likely to be gradual rather than dramatic.

What this means for you and your mortgage

If you are a homeowner, remortgaging soon, or thinking about buying, this inflation update matters.

Lower inflation can:

• Increase the likelihood of lower interest rates in future
• Improve lender confidence
• Potentially lead to more competitive mortgage pricing

However, mortgage rates do not always move in a straight line with inflation. Lenders price deals based on expectations of future rates, not just current data.

If you are approaching the end of a fixed rate, now is a good time to review your options. Even small changes in rates can make a noticeable difference to your monthly payments.

If you are buying your first home, easing inflation may gradually improve affordability, but careful budgeting remains essential.

Looking ahead

Key trends to watch over the coming months include:

• Whether food inflation continues to slow
• The direction of energy prices
• Ongoing movements in services inflation
• Signals from the Bank of England on rate policy

If CPI continues to fall closer to 2%, the conversation will shift more firmly towards rate reductions. If inflation stalls again, rates could remain higher for longer.

Conclusion

CPI inflation fell to 3.0% in January 2026, the lowest level since March last year. Falling fuel prices, easing food costs and lower education inflation all helped bring the rate down. Core inflation has also edged lower, suggesting broader price pressures are easing.

Although inflation is still above target, the overall direction is encouraging.

For you, this means some relief in day-to-day costs and a slightly more positive outlook for interest rates. But financial decisions should still be made carefully, especially where mortgages and long-term commitments are concerned.

At Kerr & Watson, you can receive clear, straightforward advice on how economic changes like inflation affect your mortgage and protection options. Whether you are remortgaging, moving home or buying for the first time, you can make confident decisions with the right guidance.

If you would like to discuss how the January 2026 inflation update could affect your mortgage plans, get in touch with Kerr & Watson today.

Read more: Consumer price inflation, January 2026