Breaking News: UK headline CPI cools, services sector inflation remains sticky. GBP/USD steady

• Annual inflation dropped to 3.0% in January, down from 3.4% in December. This is the lowest level in nearly a year
• The slowdown was driven by a sharp moderation in transport costs (falling to 2.7%) and food prices (easing to 3.6%), alongside a monthly price decline of 0.5%—the largest monthly drop since last summer.
• Core inflation fell to 3.1%, its lowest in over four years. While service-sector costs remain slightly "sticky," the overall downward trend significantly increases the odds that the Bank of England will cut interest rates to 3.5% at their next meeting on March 19.

The United Kingdom’s annual consumer price inflation YoY fell to 3.0% in January 2026, matching market forecasts and marking its lowest level since March 2025.

This cooling trend from December’s 3.4% was largely fueled by a slowdown in transport and food costs. Specifically, transport price growth eased to 2.7% as fuel prices dropped and airfare hikes moderated, while food and non-alcoholic beverage inflation dipped nearly a full percentage point to 3.6%.

Other sectors also contributed to the disinflationary trend, with housing and utilities easing to 4.5% and recreation and culture softening slightly to 2.6%. In contrast, the hospitality sector saw a bit of a heatwave, as price growth in restaurants and hotels climbed to 4.1%.

On a broader scale, core inflation, which strips out volatile food and energy costs fell to 3.1%, a low not seen since August 2021. This suggests that the underlying price pressures that have gripped the economy for years are finally losing their grip.

Overall, the month saw a 0.5% decline in consumer prices, a sharp reversal from the 0.4% increase seen at the end of 2025.

UK factory gate inflation eased to 2.5% year-on-year in January 2026, marking its lowest level since June.

This slowdown from December’s 3.1% was primarily driven by a sharp 8.4% drop in energy costs, specifically within the coke and refined petroleum sectors.

While price growth cooled for food and transport equipment, these categories remained the largest upward drivers of inflation.

Conversely, costs accelerated for tobacco, alcohol, metals, and electronics. Overall, monthly producer output prices held steady after a slight dip at the end of 2025.

The January inflation drop to 3.0% is a significant green light for the Bank of England (BoE). While the central bank held rates steady at 3.75% just two weeks ago (February 5) in a narrow 5-4 vote, this new data may shift the momentum toward a rate cut at their next meeting on March 19, 2026.

The Core Inflation Signal

Core inflation (which excludes volatile food and energy) fell to 3.1%, its lowest in over four years.

BoE Interpretation: This is arguably more important than the headline figure. It shows that "underlying" price pressures—the ones influenced by interest rates—are cooling.

Influence: A lower core rate reduces the fear of "sticky" inflation, making a 0.25 percentage point cut to 3.5% in March the most likely outcome.

Sector Divergence: Transport vs. Services

The BoE watches services inflation which has been a headache for the Central Bank and hospitality costs closely because they reflect domestic wage growth.

The Positive: Softening transport and food prices provide immediate relief to households, which may lower future wage demands.

The Concern: The acceleration in restaurant and hotel prices (4.1%) and the persistence of services inflation (running at roughly 4.5% at the end of 2025) remain "sticky."

Influence: This "stickiness" in the service sector is why the BoE will likely remain gradual with cuts rather than aggressive. They will "ease their foot off the brake" rather than stomp on the gas.

The BoE's goal is to hit the 2% target by Spring 2026. This data suggests they are exactly on track to meet that goal, likely paving the way for a sequence of cuts starting in March.

Sterling was little changed against the U.S. dollar after the ONS data.

Ona daily timeframe, GBP/USD is testing the ascending trendline and this could be a make or break period for GBP/USD.

A break lower could open up a deeper retracement while a move higher could potentially lead to fresh highs in the medium term.

GBP/USD Daily Chart, February 18, 2026

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