The UK economy has received a double shot of adrenaline as inflation dropped to a lower-than-expected 3% in January, sending the FTSE 100 to record highs and firing the starting gun on bets for an interest rate cut. Money markets are now pricing in an 86% probability that the Bank of England will slash rates next month, offering a glimmer of hope to millions of mortgage holders and businesses.

This sharp decline from December's 3.4% was driven largely by falling petrol prices and cheaper airfares, alongside a welcome slowdown in food inflation, which hit a nine-month low of 3.6%. The data has emboldened City economists, with many declaring that the "path is paved" for the Bank to act. [...](asc_slot://start-slot-27)Yael Selfin, chief economist at KPMG UK, stated unequivocally, "Today’s inflation data will likely prompt the Bank of England to lower interest rates next month," predicting a total of three cuts by the end of the year.

The Sticky Services Problem

However, beneath the celebratory headlines, a note of caution remains. [...](asc_slot://start-slot-29)Services inflation—a key metric watched by the Bank of England as a sign of domestic price pressures—proved stubbornly sticky, dipping only marginally to 4.4% from 4.5%. This persistence suggests that wage pressures and internal demand are still running hot, potentially complicating the Bank's long-term easing cycle.

Despite this, the broader trend is undeniable. [...](asc_slot://start-slot-31)Core inflation, which strips out volatile energy and food prices, fell to 3.1%, its lowest level since 2021. "The sluggish economic backdrop and a cooling labour market are all contributing to an easing inflationary picture," noted Victoria Scholar, head of investment at interactive investor. [...](asc_slot://start-slot-33)The data paints a picture of an economy that is cooling just enough to allow monetary policy to loosen without risking a resurgence in prices.

• Market Reaction: The FTSE 100 rallied to a new intraday high of 10,670 points, buoyed by the prospect of cheaper borrowing costs stimulating growth.
• Food Prices: Shoppers are seeing relief at the checkout, with prices for bread, meat, and dairy actually falling month-on-month.
• Political Spin: Chancellor Rachel Reeves hailed the figures as proof her economic plan is working, though experts note that key budget measures like energy bill cuts won't take effect until April.

Relief on the Horizon

For the average household, the macro-economic data translates to real-world relief. A March rate cut would immediately impact variable-rate mortgages and eventually feed through to fixed-rate deals. Combined with the forecast drop in energy bills in April, the spring promises a significant easing of the cost-of-living squeeze that has defined the last few years.

"Bills aren’t going to drop overnight," experts warn, but the direction of travel is finally positive. [...](asc_slot://start-slot-35)As the Bank of England prepares to meet, the pressure to cut rates is now intense. The era of soaring inflation appears to be over; the question now is how quickly the recovery can begin.