The latest UK inflation figures from the ONS bring unwelcome news, as CPI inflation surged to 3% in the year to January—outpacing City forecasts of 2.8% and hitting a 10-month high.
Driving this latest spike were rising costs of essentials like bread, meat, and private school fees, plus air fares decreasing by less than had been expected, underscoring the ongoing cost-of-living squeeze. Consumers continue to feel the strain, while businesses remain under pressure. All eyes are now on the Bank of England’s Monetary Policy Committee (MPC) ahead of its next interest rate decision. While the Bank has anticipated inflation rising into the summer, it has also been preparing for potential rate cuts amid sluggish economic growth. Could today’s data shift that outlook?
Here’s how experts across financial services are reacting to the latest inflation news.
Rob Clarry, Investment Strategist at wealth management firm Evelyn Partners, says: ‘The UK continues to face stickier inflationary pressures compared with other advanced economies. This is arguably reflected in the bond market with gilts yields remaining considerably higher than their European counterparts, despite the UK facing a similarly weak growth profile.
‘Both the headline and core CPI measures ticked up this month, driven higher by transport, food & non-alcoholic beverages, and education as the imposition of VAT on private education shows up in the inflation data. Prices also increased in the recreation sector, which could have been driven by companies getting ahead of the rise in National Insurance contributions.
‘Services inflation, which represents a better gauge of domestically generated inflation than headline CPI, also accelerated from 4.4% to 5.0%. Although it was slightly softer than the 5.1% estimated by consensus.
‘This CPI print undoubtedly complicates the Bank of England’s job. Last week’s GDP data confirmed the UK economy is barely growing, and the Bank increased its CPI forecast on the back of higher global energy prices. This combination of low growth and above-target inflation is a challenging mix for the Bank to navigate.
‘They will be hoping that higher energy costs and tax rises will not lead to new inflationary spiral. It’s likely they will look to maintain restrictive policy to reduce the probability of this scenario materialising. The risk is that they further weaken the already fragile domestic demand. In our view, the growth risks will outweigh the inflation risks over the coming quarters, and the Bank will continue its interest cutting cycle.
‘As the gilt market opened there was a bit of pressure on front end yields. There was a limited reaction in foreign exchange markets, with the pound slightly weaker against the dollar. Similarly, money markets took the news in their stride, continuing to expect two interest rate cuts in 2025.’
Tom Stevenson, investment director at Fidelity International, said: “The jump in January inflation to 3.0% was worse than expected and unwelcome. Higher airfares and the introduction of VAT on private school fees meant December’s move back towards the inflation target was always likely to be reversed in the New Year. But the outcome was significantly higher than the 2.8% forecast by most economists.
“This month’s spike looks like being the start of a tricky six months on the growth and inflation front. The Bank of England recently warned that rising energy prices would see inflation reaching 3.7% by the third quarter of this year. At the same time, the economy is stagnating, with barely any growth at all in the six months since last year’s election.
“Rising wage growth, which hit 5.9% this week, is also driving headline inflation higher, although that factor may go into reverse as businesses rein in their hiring plans ahead of April’s hike in employer national insurance contributions. Cost of living pressures are pushing grocery inflation down as shoppers turn to non-branded products to manage the price of the weekly shop. A number of services, like broadband and phone deals, with index-linked contract renewals due in the spring, could see prices rise less slowly than they did a year ago.
“This push and pull on inflation complicates the Bank’s policymaking. It cut the base rate by a quarter point to 4.5% earlier this month, with two members of the monetary policy committee calling for a larger cut of half a percentage point. But persistent above target inflation supports its ‘gradual and careful’ approach to cutting the cost of borrowing. Most economists expect rates to fall to about 4% by the end of the year.
“For investors, even a modest reduction in interest rates should keep downward pressure on the pound because the Federal Reserve looks unlikely to cut the cost of borrowing at the same rate in the US. That should provide a tailwind for the FTSE 100. Exporters and overseas earners which dominate the UK benchmark index benefit from weak sterling.”
Commenting on the ONS latest inflation figures, Sarah Pennells, Consumer Finance Specialist at Royal London said:
“December marked only a temporary reprieve from rising inflation and while the cost of living crisis may have eased, many people are still facing tough times financially. Royal London cost of living research shows that almost nine out of ten adults are worried about rising energy costs and just over eight in ten about higher food bills.
“If inflation continues rising as forecast this year, it could put the most vulnerable at further financial risk. One in ten adults currently say they couldn’t afford any unexpected bill – no matter how small – from either their savings or income. With wholesale gas prices recently reaching their highest level for two years, many will be concerned about consumer energy prices and this inflation data will only increase anxiety about everyday costs such as energy bills.”
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management (JPMAM) said: “This week’s data will cause quite the headache for the Bank of England and raises questions about the decision to cut interest rates this month. Hot on the heels of strong wage data yesterday, this morning’s hotter-than-expected inflation print will raise alarm bells at Threadneedle Street. With the hike in employer taxes and the minimum wage increase still coming down the tracks, it is hard to see how inflation dynamics will improve meaningfully in the near term.
Some members of the Monetary Policy Committee have expressed concerns around growth weakness but, in my view, any slowing in the labour market will likely be limited as firms are compelled to hoard workers amid ongoing labour shortages. The Bank should, therefore, place greater weight on the upside inflation risks as opposed to any moderate cooling in economic activity. If the Bank decides to take its foot off the brake too quickly, it would be far more painful to re-anchor inflation expectations further down the line.”
Nathan Emerson, CEO of Propertymark, comments: “A slight rise in inflation had been widely speculated, especially with the Bank of England predicting inflation to increase to around 2.8% by the third quarter of 2025, before easing back downwards again.
“Today’s news may throw many questions into the mix for homebuyers and sellers as they look to make their first or next move, especially given that interest rates have recently started to ease. However, it remains positive that mortgage borrowing currently remains lower compared to only twelve months ago, and new and improved mortgage products are continuing to enter the marketplace.”
Simon Webb, managing director of capital markets and finance at LiveMore, commented:
“Inflation has nearly doubled since September, when it was at 1.7%. Unfortunately, this rise to 3% – although quite a leap from 2.5% in December – isn’t surprising when you factor in market conditions and recent government policy.
“These price increases will further increase challenges for borrowers still straining to make their mortgage payments. People who have come to the end of fixed terms, for example, and have moved onto standard variable rates will feel this. For many people aged 50 to 90 plus, they may mistakenly believe that they’re mortgage prisoners, trapped in SVRs, when in fact they could well be eligible for a wide range of mortgages not usually available to people in these age groups.”
Richard Pike, chief sales and marketing officer at Phoebus Software, said: “This huge jump in inflation to 3% was probably to be expected given last month’s unexpected drop, and is in line with the Bank of England’s expectations of a gradual rise in inflation leading into the third quarter of the year.
“But it does create ongoing uncertainty and challenges within the UK economy, particularly in the financial services and mortgage markets. While the recent Bank Rate cut offers some relief to borrowers, rising inflation may temper expectations of further reductions in the near term.
“This slight uptick in inflation, with energy prices expected to rise in coming months, reinforces the need for lenders to remain agile, ensuring they can adapt to shifting affordability concerns and evolving borrower needs.”
Mark Eaton, Chief Operating Officer, longer-term lender April Mortgages, comments: “A resurgence in inflation is a reminder that the Bank of England is walking a tightrope when it comes to managing interest rates.
“There has been talk of further rate cuts this year, but those predictions feel premature with prices now rising more quickly. The truth is no one knows for sure what comes next.
“The Bank is forecasting that inflation will peak at 3.7% this year provided core inflation, which strips out volatile goods and services such as food and energy, remains stable.
“While the Bank is optimistic that it will fall back to 2% shortly after this, it may be wary of cutting rates too soon and will need to adapt quickly in response to global events.
“For borrowers, rising living costs will put further pressure on already stretched incomes and compound the affordability challenge impacting buyers across the country, particularly those trying to get a foot on the ladder. Access to larger loan amounts via modern 10 year fixed rate products won’t fix the problem but they could help borrowers overcome these hurdles. The mortgage market is in for a bumpy ride this year.”
John Phillips, CEO of Just Mortgages and Spicerhaart, said: “Following a surprise drop last month, inflation has surprised once again, coming in higher than many markets and analysts had expected. Alongside upward pressures on food and transport, a key factor was education as private schools became subject to VAT in January and passed this on in higher fees.
“We have to be realistic and acknowledge that inflation is likely to remain a persistent challenge this year, particularly with geopolitical tensions escalating, higher energy prices later in the year and as we see the full effects of government policy, such as the national insurance hike. We also have the elephant in the room and the upcoming Spring Statement at the end of March.
“All along though, the central bank has maintained that it will push forward with multiple base rate cuts this year, as it balances sticky inflation with an economy showing minimal growth. Whether today’s bigger rise in inflation changes that trajectory is yet to be seen.
“From our perspective, January proved to be a positive month and this has continued into February with consistent levels of buyer registrations and demand for both valuations and adviser appointments. Customers have responded well to positive changes in the market with the base rate cut and both pre-emptive and subsequent cuts from lenders. While it is important to keep inflation under control, our hope is we do see further base rate cuts this year to maintain this positive momentum and allow the housing market to play its important role in driving economic growth.”
Inflation shock means rate cut next month is decidedly off the table says Derrick Dunne, CEO of YOU Asset Management, comments on this morning’s inflation figures:
“Today’s inflation data is a blow to consumers already trying to make ends meet, and it underscores the formidable task ahead for policymakers as they look to curb persistent price pressures.
“With inflation and wages rising so sharply, the prospect of a rate cut at the forthcoming Monetary Policy Committee (MPC) meeting in March now appears decidedly off the table.
“Looking ahead, we expect inflation to continue its upward trend in the coming months, largely driven by rising energy bills.
“While there remains a possibility that the MPC will reduce borrowing costs in May, that is becoming a more distant prospect. Unless we see an unexpected moderation in inflation and wage growth, early summer now seems to be the most probable window for the Bank of England to consider acting.
Lily Megson, Policy Director at My Pension Expert, said: “Just as things may have been looking up, today’s announcement has brought Britons back down to Earth with a thud.
“At a time when households were hoping to save and plan for retirement more confidently – especially following the Bank of England’s decision to cut interest rates earlier this month – rising consumer prices will now cast fresh doubt over their financial security. Many will be left wondering how to protect their long-term plans while managing mounting day-to-day costs.
“The government can’t continue to bury its head in the sand. They must work with the financial services sector and ensure that every avenue to financial education, guidance and advice is open and accessible. Then, and only then, can Britons be fully empowered to understand how they can achieve their financial goals.”
Matt Tickle, Chief Investment Officer at Barnett Waddingham comments: “Today’s CPI inflation figure of 3.0% was above market expectations of 2.8% and is the highest in 10 months. This highlights that, although significant progress has been made since the October 2022 peak, inflation remains a significant challenge for the Bank of England. This was mostly driven by factors outside the Bank’s control, such as energy & school fees, while core items showed smaller rises, in line with our view that over the longer-term inflation should still fall back to target.
“The Bank has already signalled its concerns about growth and the need to reduce rates to support the economy, but with inflation set to continue rising to a peak of 3.7% in Q3 2025 and rising wage growth data released on Tuesday, we think this is going to be challenging and expect a slow path of rate cuts.
“Overall, we believe the impact of this recent uptick in inflation is likely to be muted for investors. Defined Benefit pension schemes continue to be well hedged against this risk and for other investors we expect this increase to be temporary and expect disinflationary conditions to return into 2026 in the UK.”
Scott Gardner, investment strategist at J.P. Morgan owned digital wealth manager, Nutmeg, said:
“UK inflation has come in much higher than expected with the latest data presenting a worrying assessment of the UK economy. Prices pressures are far from tamed and now clearly moving in the wrong direction.
“Driving this increase; core and services inflation rebounded with PMI output prices showing a clear trend upwards through the final quarter of last year and January. We also saw household costs rise with the energy price cap increase starting to filter through after a 1.2% rise at the start of this year from the previous quarter and food prices come in higher than expected.
“Looking at the bigger picture, inflation is expected to come in higher than initially expected this year with the Bank of England revising their forecast of peak inflation to 3.8% from 2.75%. However, the knock-on effects from a potential global trade war haven’t been factored in, nor have we seen the full impact of the changes to National Insurance Contributions for employers, both of which could be a headache for the UK economy later in the year.
“The market is currently pricing in two more rate cuts this year for now, but the cadence of future activity feels far from certain.”
