21 January 2026
If you are covering the latest inflation figures, please see the following comment from Lindsay James, investment strategist at Quilter:
“Inflation at 3.4% at the end of last year, up slightly from 3.2% the month before, reflects price pressures shaped by lower household energy costs on one hand, but with offsetting pressure from higher air fares, tobacco and clothing, some of which is due to timing effects. While a modest uptick was expected there will be some disappointment to see services inflation picking up marginally to 4.5%. However, the broader direction of travel remains encouraging over the medium term, even if progress back to the Bank of England’s 2% target continues to be uneven.
"That backdrop allowed the Bank of England to cut interest rates by a quarter point to 3.75% in December, and there are growing signs that inflation could fall more sharply over the next year. The Bank’s own projections now see CPI dropping to around 2.5% by the end of 2026, although much of that improvement is mechanical, driven by measures in the Budget such as the rail fare freeze, the removal of certain green levies on household energy bills and a falling contribution from fuel prices. At the same time, those forecasts also assume only weak GDP growth and a stable unemployment rate, with risks arguably now tilted to the downside after several months of disappointing labour market data.”
“If the UK were to slip into recession, that would likely accelerate the downward path of inflation further and increase the pressure on the Bank to deliver deeper rate cuts.
“There are also important global factors at play. Bank of England policymaker Alan Taylor has highlighted a sharp shift in global trade, with Chinese exporters redirecting goods towards the UK and Europe following higher US tariffs. Exports from China to Britain were up nearly 8% last year, and this influx of cheaper goods is helping the disinflation story. The Bank’s research suggests this trade diversion alone could trim inflation by around 0.2 percentage points in both 2026 and 2027, and Taylor has indicated the impact could be even larger, strengthening the case for further rate cuts.
“Alongside falling food prices, stabilising energy costs and UK tax changes due in April designed to ease price pressures, this points to inflation cooling more quickly than the Bank previously assumed. However, that process is unlikely to be smooth as evidenced today.
“Energy markets also remain vulnerable to geopolitical tensions, including developments around Greenland and the wider Arctic region, which could yet reintroduce volatility into the inflation outlook.
“For now, markets are pricing in one or two interest rate cuts during 2026, with the next not expected until June, meaning there is scope for more if this disinflationary trend reasserts itself after this short-term bump.
