The U.K.'s annual inflation rate fell for the third straight month in January, easing pressure on the Bank of England to raise interest rates, but remained in double digits and near its highest level in 40 years.
The Office for National Statistics (ONS) said annual inflation, as measured by the Consumer Prices Index, fell to 10.1%, continuing a decline from 10.5% in December and its recent peak of 11.1% in October. City economists had projected a modest decline to 10.3 percent.
Driven by a continued decline in gasoline and diesel prices for motorists at the beginning of the year, as well as a drop in prices for air and bus travel after a sharp increase in December.
Prices for restaurants, cafes and takeaways also fell month on month, while the cost of furniture fell as retailers focused on January sales.
The latest figures come as the central bank considers whether further rate hikes are warranted to fight inflation, a move that would increase pressure on borrowers after 10 consecutive rate hikes in the past 18 months.
U.K. inflation remains higher than in the U.S. or the 20 EU countries in the eurozone, and some forecasters have said acute labor shortages in the U.K. and other constraints on the economy such as Brexit could increase inflationary pressures. U.S. inflation fell to 6.4% in January and is estimated at 8.5% in the eurozone.
Grant Fitzner, the ONS's chief economist, said inflation has likely peaked after reaching its highest level since 1981 in October. "Barring geopolitical risks and something completely unexpected, yes [it has peaked] … The general direction seems to be south," he said.
As a cornerstone of his economic plans, Rishi Sunak has promised to halve the annual inflation rate this year. Most economists forecast a decline in coming months amid a drop in global energy prices and as the initial surge in markets following Russia's invasion of Ukraine falls out of the annual inflation gauge.
Wholesale energy and commodity prices have fallen sharply in recent months, including a drop in European gas prices to their lowest level in 17 months. Overall consumer prices, however, remain high and are still rising rapidly, albeit at a slower pace than in December.
Chancellor Jeremy Hunt said, "While any fall in inflation is welcome, the fight is far from over. High inflation stifles growth and causes pain for families and businesses – that's why we must stick to the plan to cut inflation in half this year, reduce debt and grow the economy."
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The ONS said there was further evidence that business costs were rising at a slower pace than in previous months, due to falls in crude oil, electricity and petrol prices.
However, food and drink inflation remained at near the highest rates since the 1970s, with rising prices for milk, bread and other staples pushing prices up by nearly 17% in a year.
Rising prices for alcohol and tobacco also added to upward pressure on inflation, following seasonal price cuts in December.
Charities warned that the rising cost of a week's groceries is putting the most pressure on lower-income households, who spend proportionally more on necessities than higher-income households. Thinktank Resolution Foundation said the poorest tenth of households experienced an inflation rate of 11.7% in January, compared with just 8.8% for the richest.
Helen Dickinson, chief executive of the British Retail Consortium, said food prices remained high due to the knock-on effect of rising energy and fertilizer prices following the invasion of Ukraine. "When the Christmas discounts disappeared, households will have felt the pinch in their weekly grocery store."
The government is preparing to reduce the level of energy support for households and businesses this spring, as charities and business leaders worry that the cost of living emergency in the UK is far from over.
Rachel Reeves, the shadow chancellor, said, "Despite the UK's huge potential, households will be hit by another economic blow in April as energy prices rise. With inflation still near a 40-year high, people will wonder if they and their families are better off after 13 years of Tory government. The answer will be no."
Economists said weaker inflation could ease pressure on the Bank of England to raise interest rates above the current rate of 4%, the highest level since the 2008 financial crisis.
Services inflation fell from 6.8% in December to 6% in January. The figure will be closely watched by the central bank for signs that rising employee wages are causing companies to push up prices.
James Smith, economist at Dutch bank ING, said, "A word of warning: one month does not a trend make. By definition, the Bank of England's focus on "persistence" suggests that policymakers will be less troubled by month-to-month fluctuations in this data. However, we believe that service inflation has likely peaked."