Inflation goes up to 3%

The rate of inflation went up to 3% in January 2025 - a ten-month high.

Economists had been expecting inflation to climb from 2.5% in December to 2.8% last month.

Grant Fitzner, chief economist at the Office for National Statistics, said: “The rise was driven by air fares not falling as much as we usually see at this time of year, partly impacted by the timing of flights over Christmas and new year.

"This was the weakest January dip since 2020.

"After falling this time last year, the cost of food and non-alcoholic drinks increased, particularly meat, bread and cereals.

"Private school fees were another factor, as new VAT rules meant prices rose nearly 13% this month."

What is inflation and how is it measured?

Inflation is a measure of how fast the price of goods and services is going up.

The Office for National Statistics measures inflation by tracking the prices of hundreds of everyday items in an imaginary shopping basket. 

So the headline inflation figure will show how much the price of this shopping basket has gone up.

It’s important to remember that if the rate of inflation falls, it doesn’t mean prices are coming down.

It just means they’re going up at a slower rate.

Inflation set to rise in 2025

The Bank of England expects inflation to hit 3.7% in the third quarter of the year, due to factors such as higher global energy costs.

But it believes inflationary pressures at home will “wane further” throughout 2025.

And that means inflation should fall back to around the Bank of England’s target of 2% shortly afterwards.

This could explain why the Bank’s Monetary Policy Committee felt confident cutting interest rates to 4.5% earlier this month. 

That’s the lowest they’ve been since June 2023.

How is inflation linked to interest rates?

If inflation gets too high, the Bank of England can increase interest rates to bring it back under control.

This base rate influences the interest rates offered by banks and lenders.

So a rate increase means borrowing is more expensive, and people will have less money to spend elsewhere.

That, in turn, means demand comes down, slowing price increases and helping inflation fall.

If, on the other hand, inflation is too low, the Bank of England may cut interest rates to make borrowing cheaper, encourage spending and drive economic growth.