The UK Retail Price Index (RPI) rose 3.8% year on year in January. This was below the 3.9% forecast.
The reading was 0.1 percentage points under expectations. It points to slightly lower annual RPI inflation than predicted for the month.
Inflation Trend And Policy Outlook
January’s RPI print of 3.8%, just under the forecast, supports the view that inflation is trending lower. This extends the pattern seen through 2025, when the headline rate steadily dropped from above 5%. It also increases the chance that the Bank of England will cut interest rates sooner than expected.
Markets are already reacting at the front end of the curve. Short Sterling or SONIA futures for the second quarter have moved higher. Traders now price in close to an 80% chance of a 25 basis point cut at the May Monetary Policy Committee meeting, up from about 60% last week. As a result, more traders are using interest rate derivatives to position for falling yields.
Gilt futures are benefiting from this shift in sentiment, and we expect the move higher to continue in the coming weeks. The 2-year Gilt yield, which is very sensitive to Bank Rate expectations, has already fallen 10 basis points in early trading. We saw something similar in late 2023, when softer inflation data triggered a strong rally in government bonds.
The prospect of earlier rate cuts is also pressuring Sterling. We expect GBP/USD to struggle to hold above 1.28 as the UK’s yield advantage over the US narrows. Derivative traders may consider GBP puts as a simple way to position for possible weakness in the pound.
Growth Backdrop And Rates Bias
This inflation reading also follows Q4 2025 GDP data showing very weak growth of just 0.1%. Falling inflation combined with a flat economy strengthens the case that the Bank will focus more on supporting growth. This reinforces our view that the most likely direction for UK rates is down.
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