Double good news as big fall in January CPI signals rapid return to ‘normal’ inflation

CPI inflation fell in January, dropping by 0.4 percentage points compared with December to reach 3.0 per cent – the largest fall since September 2024 – and should now settle back around the 2 per cent target in the coming months for the first time since before the pandemic, the Resolution Foundation said today (Wednesday).

With good economic news generally in short supply, this drop is in line with the fall expected by markets, but slightly below the half a percentage point drop forecast by the Bank of England.

Inflation is now expected to return to around the 2 per cent target in April and remain close to that level, heralding a return to ‘normal’ inflation for the first time since at least 2019.

There is further good news under the bonnet, with the fall in the headline rate of inflation largely driven by falls in the price of key essentials, including petrol, food and gas bills.

However, this slowing in the rate of inflation does not signal an end to cost of living pressures as many households continue to struggle with the higher cost of essentials – with energy bills still 60 per cent higher in real terms than they were five years ago, and food prices 39 per cent higher.

The quicker fall in the rate of inflation expected over the course of this year will be largely driven by government action on energy bills, which are set to drop in April.

James Smith, Chief Economist at the Resolution Foundation, said:

“There was finally some good news as CPI inflation fell sharply in January to its lowest level since March last year. The fall was broad based, driven by lower prices for some key staples such food, energy and petrol.

“The fall in January signals a rapid return to ‘normal’ inflation in the coming months as the rate of price rises settles close to the 2 per cent target for the first time since before the pandemic.

“While the era of high inflation is hopefully behind us, it has left us with a legacy of a lasting increases in the cost of essentials that continues to stretch the budgets of the country’s poorest families.”