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The latest official figures from the Office for National Statistics (ONS) show that inflation fell to 3.0% in January 2026, its lowest level since March 2025 and down from 3.4% in December.
The slowdown was driven predominantly by falls in petrol prices, air fares and food costs – key everyday components of household budgets. Petrol prices declined noticeably in January, while food inflation eased significantly, helping to drag the overall Consumer Prices Index (CPI) back toward the Bank of England’s (BoE) 2% target.
Economists had broadly expected inflation to continue its downward trend after peaking at around 3.8% last year, and the latest figures align with those forecasts.
However, not all prices are easing at the same pace: services inflation remains elevated, and core inflation (which strips out the most volatile components) also eased only modestly.
Early Interest Rate Cuts Now More Likely
With inflation back on a downward trajectory toward the Bank of England’s 2% target, markets and economists alike have stepped up expectations of an interest rate cut as early as the March Monetary Policy Committee (MPC) meeting.
Currently, the BoE’s base rate stands at 3.75%, held in place recently as policymakers weighed weaker growth and sticky components of inflation. But the latest drop in inflation has strengthened the case for loosening monetary policy in the coming months, with many economists now expecting one or more interest rate cuts through 2026.
Lower inflation and the prospect of reduced borrowing costs could help ease pressure on households and businesses after a period of higher interest rates aimed at taming price rises.
What This Means For The Property Market
The latest inflation drop and the possibility of earlier rate cuts are particularly significant for the property market, where interest rates play a central role in activity.
Mortgages and borrowing costs
Mortgage rates for homebuyers are heavily influenced by the BoE’s base rate and the expected path of future rate moves. If the Bank cuts interest rates this spring, borrowing costs are likely to fall, albeit gradually, which could:
- Lower monthly mortgage payments for homeowners with variable or tracker mortgages, providing some financial relief.
- Encourage first-time buyers and other prospective purchasers back into the market as borrowing becomes cheaper.
- Help stimulate demand for property transactions after a period of subdued activity due to higher rates.
House Price Trends
Slower inflation and lower rates can support house price stability or modest growth, especially if demand strengthens. After a phase of cooling – and in some areas modest price falls, as seen previously – renewed confidence among buyers can support price resilience.
However, experts caution that the response in the property market won’t be instantaneous. Mortgage lenders typically take time to adjust their rates fully in response to Bank rate moves and broader economic conditions, such as employment and wage growth, will also shape housing demand.
The Outlook
Most economists expect inflation to continue sliding toward the Bank of England’s 2% target later this year, potentially giving the BoE room to implement further easing if needed.
For households, a combination of lower inflation and falling interest rates would ease the cost-of-living squeeze and help to stabilise housing costs. For the property market, the combination of a more predictable inflation scene and cheaper borrowing could reinforce buyer confidence and gradually lift activity levels after a prolonged period of caution.