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UK inflation data for January is released tomorrow (18 February), and while forecasters expect a decline in UK inflation, it is still expected to remain well above the Bank of England’s target rate.
The headline rate of Consumer Prices Index (CPI) inflation is expected to have fallen to 2.9% in the year to January 2026, according to the Bank of England’s latest projections. This is down significantly from the 3.4% figure for the year to December 2025, but remains higher than the Bank’s 2% target.
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“CPI inflation should fall to 3.0% in January… as energy, airfares, education and food price inflation all slow,” said Robert Wood, chief UK economist at Pantheon Macroeconomics.
“Services prices will likely take a step down in January as part of their usual discounting,” said Sanjay Raja, chief UK economist at Deutsche Bank, adding that he expects services prices across the board to fall around 0.4% from December.
While it rose in December, the UK’s inflation rate is trending downwards over time.
While they expect CPI to grow at around 3% during the first quarter of 2026, Bank of England forecasts currently predict that inflation will fall to 2.1% in April, largely thanks to disinflationary measures included in last year’s Autumn Budget.
What is inflation?
Inflation is an economic metric that measures the rate at which prices are rising within an economy. It is one of the key metrics observed by policymakers, including politicians and, crucially, central bank interest rate-setters, in order to make decisions relating to the economy.
There are various ways of measuring inflation, but the key one is CPI. This is the inflation metric that most economists and policymakers regard as the headline measure of inflation in the UK and worldwide.
Most economists view 2% as the optimal CPI rate for a healthy economy. It implies that prices are rising (which indicates economic growth), but slowly enough not to become unmanageable for business and household budgets.
How does UK inflation impact your money?
Inflation impacts your money both directly and indirectly.
Directly, the rate of inflation reflects the pace at which the price you pay for goods and services increases. Assuming your income doesn’t change, higher rates of inflation will mean you have less purchasing power; your monthly budget may not stretch as far or you may not have as much disposable income left once you’ve paid for your essentials.
Indirectly, it impacts various aspects of the economy that are in turn reflected in your finances. This could include increases in the bills you pay (many utilities, for example, increase annually in line with retail prices index (RPI) inflation) or pay rises from your employer, but most importantly, inflation feeds into interest rates.
Central banks, such as the Bank of England, raise or lower interest rates in order to balance controlled inflation against healthy economic growth. When inflation is running high or expected to rise, policymakers (specifically the Bank’s Monetary Policy Committee, or MPC) raise interest rates in order to discourage inflation. When economic growth is weak, they lower them in order to stimulate growth.
Interest rates in turn feed into various key components of your personal finances. For example, higher rates mean you’ll likely pay more interest on your mortgage. But at the same time, they also mean you should earn more interest on your savings or cash ISA.
So a drop in UK inflation now could have implications for your finances next time the MPC meets to set interest rates.