Inflation has fallen to 3% from 3.4% last month, pointing to a likely interest rate cut by the Bank of England next month.
The fall was in line with forecasts and brings price growth down to its lowest level since last March.
Falling inflation is also a timely boost to Chancellor, Rachel Reeves ahead of next month’s spring statement when she will update on the country’s finances.
It comes against weaker figures on economic growth and unemployment. GDP expanded by only 0.1% in the three months to the end of December, while unemployment increased to a five-year high of 5.2%.
Inflation peaked last year at 3.8% and is now closer to the Bank’s 2% target.
In November’s Budget Ms Reeves Reeves predicted a cut in inflation after announcing cuts to energy bills and rail fares.
Responding to today’s data, she said: “Our economic plan is the right one, to cut the cost of living, cut the national debt, and create the conditions for growth and investment in every part of the country.”
Martin Sartorius, lead economist at the CBI, said: “Inflation ticked down in January, broadly in line with the Bank of England’s projections. We expect this downward momentum to continue in the coming months, reflecting the fading impact of last year’s energy and utility price increases.
“January’s slowdown in inflation, alongside cooling labour market conditions, increases the likelihood that the Monetary Policy Committee will cut rates again over the next couple of months.
“Beyond then, the scope for further Bank Rate reductions will become more limited, as the Committee looks to ensure that inflation returns sustainably to the 2% target.”
Luke Bartholomew, deputy chief economist, at Abderdeen Group, said: “The drop in inflation back to 3% should clear the way for the Bank of England to cut interest rates in March. Granted services inflation was a tad stronger than expected, and this does play an important role in the Bank’s thinking.
“But with the labour market data yesterday pointing to ongoing weakness in employment and a further softening in pay growth, most policymakers are likely to look through any short run stickiness in the services data.
“Indeed, inflation is set to fall further in coming months, falling back to 2% in the near future, which should open up further rate cuts later this year.”
The latest figure may also help boost Labour’s prospects in next week’s by-election in Gorton and Denton.
Stock prices in London closed mostly higher, as investors bet on the Bank of England cutting interest rates in March after unemployment increased, while the pound fell.
The FTSE 100 index closed up 82.48 points, 0.8%, at 10,556.17, a new record high.
The pound was lower at $1.3531 on Tuesday afternoon from 1$.3629 at the equity market close on Monday.
The unemployment rate came in at 5.2% for the three months ended December, up from 5.1% in the three months ended November.
…more follows
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