The latest UK consumer price index reading showed headline inflation at 3.0% year-on-year, down from 3.4% the prior period. The fall was largely attributed to seasonal drivers - notably a drop in air fares, lower fuel prices and base effects tied to earlier tax adjustments - which together lifted the overall disinflation picture.
Analysts say the data send mixed signals for the Bank of England's policy path. While several measures of price growth have moderated, persistent strength in services inflation and questions about labor market momentum leave room for caution around the timing and scale of rate reductions.
How major forecasters interpret the data
- ING frames the CPI release as a "mixed bag" that is unlikely to derail its view that rate cuts are on the horizon. The bank highlights the notable easing in food inflation - down from 4.5% to 3.6% - as a positive development. ING expects inflation to dip below the 2% target temporarily in April before stabilizing, and it retains forecasts for interest rate reductions in March and June.
- Jefferies notes the print gives policy hawks "some cover to argue for caution," but stresses that the broader disinflation trend remains intact. The firm points to contained goods prices, falling food inflation and slowing momentum in services inflation. Jefferies anticipates a weakening labor market will drive more aggressive rate cuts than markets currently price in, projecting Bank Rate could be around 3% by the end of 2026.
- Capital Economics highlights the potential for a sharper fall in inflation in April when a set of government-imposed price increases from 2025 drop out of annual comparisons. The consultancy expects CPI to average 1.8% in the fourth quarter of this year, a trajectory that could prompt more extensive rate easing than investors presently expect, and it suggests rates might reach 3.00% this year.
- Deutsche Bank Chief UK Economist Sanjay Raja describes the report as containing both "good news and bad news." While headline CPI declined to 3% as expected, services inflation remained sticky at 4.4% year-on-year. Raja nonetheless views the disinflation path as intact, forecasting that CPI should approach 2% by spring as administrative price rises fall out of year-on-year comparisons and slower wage growth helps restrain prices.
Market and policy implications
The collective view among the forecasters outlined above is that the Bank of England is likely to move toward rate cuts in the coming months, with many analysts flagging March or April as plausible timing for the first reduction. That consensus coexists with caution: sticky services inflation and uncertain labor market trends could complicate the central bank's sequencing of cuts.
For markets and sectors, easing headline inflation and falling food and goods price pressure support a narrative that interest rates will be lower ahead - a dynamic relevant for interest rate-sensitive sectors and fixed-income markets. Conversely, persistent services inflation and potential labor-market resilience could sustain higher rates for longer, affecting consumer-facing services and sectors where wage-driven costs are a material input.
Bottom line
The CPI release points to continued disinflation driven by seasonal and base effects, but it leaves open the question of how quickly and how far rates will be eased. Forecasters largely retain expectations for cuts beginning in the spring, yet they also emphasize that services inflation and labor dynamics remain important uncertainties for the Bank of England's path.