Price rises in the UK slowed for a third month running but inflation remains near a 40-year high, official figures showed.
UK CPI fell to 10.1% in the year to January from 10.5% in December, better than City forecasts of 10.3%, according to the Office for National Statistics (ONS).
On a monthly basis, CPI fell by 0.6% in January 2023, compared with a fall of 0.1% in January 2022.
The largest downward contribution to the change came from transport and restaurants and hotels, with rising prices in alcoholic beverages and tobacco making the largest partially offsetting upward contribution to the change, the ONS said.
Food inflation also remained high in January at 16.7% and is one of the main drivers fuelling overall inflation, along with energy bills, according to the ONS.
The core Consumer Prices Index including owner occupiers' housing costs, which excludes energy, food, alcohol and tobacco, fell to 5.3% in the 12 months to January 2023 from 5.8% in December 2022.
ING Economics said the numbers certainly “throw in a curveball for the Bank of England’s (BoE) March meeting”.
Alongside the weaker than forecast headline figures, they highlighted that core inflation was “was also much lower than expected, and slipped below 6% for the first time since last June”.
ING still expects the BoE to raise interest rates by 25bps next month but added “if this trend in services inflation persists, then it would be a strong argument in favour of pausing in May”.
Simon French at Panmure Gordon agreed it was a good number. He tweeted: “An encouraging UK inflation report. There were just signs in the November & December reports that UK was at risk of becoming an outlier. Less compelling in today's report. Core inflation pressures easing to +5.8% YoY (+6.3% prev.) probably the most pleasing data point.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, also highlighted the core figure as a “downside surprise” and thinks the report gives the BoE's Monetary Policy Committee (MPC) the flexibility to keep the bank rate at 4.0% at next month’s meeting.
“January’s data aren’t the final word, February’s data will be published on March 22, on the day of the MPC’s vote and one day before its decision is announced, but they should greatly strengthen the MPC’s faith in its forecasts for CPI inflation to fall rapidly back to the 2% target over the next 18 months,” he said.
“Looking ahead, we continue to expect the headline rate to fall to about 2% by the end of this year,” he added.