New year, new inflation – CPI jumps to 3 per cent in January with more energy-driven increases ahead 19 February 2025 CPI inflation rose sharply by 0.5 percentage points to 3 per cent in January 2025, exceeding market expectations of 2.8 per cent and kicking off another year or rising inflation, compounding financial pressures for low and middle-income households. Beneath the headline rate, the increase was driven by a rebound in airfares, broad-based increases in food-price inflation, and one-off planned increases in private school fees (due to the addition of VAT) and the bus fare cap. As a result, services inflation – a key indicator of underlying inflation for the Bank of England – rose to 5 per cent in January, a substantial increase of 0.6 percentage points. While this won’t please mortgagors hoping for rapid interest-rate cuts, the one-off nature of these price increases – and the fact that the increase in services inflation was smaller than the Bank of England expected – should mean that the impact of the new data on interest rates is limited. While there are no signs that inflation will return to the heights seen in 2022, this latest increase exceeded market expectations, and underlying indicators show that above-target inflation is likely to persist this year. The Bank of England expects inflation to peak at 3.7 per cent this autumn, mainly driven by rising energy prices. This is concerning for lower-income families, who spend a larger share of their income on essentials and are more likely to receive working-age benefits which will rise by just 1.7 per cent in April, deepening financial strain. James Smith, Research Director at the Resolution Foundation, said: “Inflation is rising again – jumping by 0.5 percentage points to reach 3 per cent in January, surprising markets and the Bank of England to the upside. The rise was partly due to a bounce back in the price of airfares but also rising food prices and planned increases in bus fares and private school fees. “More worryingly, inflation is set to rise further in the coming months – mainly driven by higher energy prices which hit lower-income families hardest. With inflation set to peak at 3.7 per cent later this year, and working-age benefits barely rising, the cost of living crisis is far from over.”
