Significant Drop in UK Inflation Announced Alongside Positive Outlook for Energy Bills
By Jess Sharp, Money Reporter – Sky News
Date: Wednesday 18 February 2026
The UK has witnessed a notable easing of inflation in January, sparking optimism for consumers and the broader economy. Inflation — the rate at which prices rise across the economy — fell to 3% in January, down from 3.4% in December, marking the lowest level since March 2025. This encouraging development coincides with forecasts of a substantial reduction in household energy bills beginning in April.
Inflation Falls to 3% — Lowest in Nearly a Year
The drop in inflation reflects several key factors, including decreases in airfares and food prices. Notably, the costs of meat, bread, and cereals have contributed significantly to lowering the inflation rate. However, not all sectors reflected easing prices; increased costs for hotel stays and takeaway meals exerted upward pressure on inflation during the same period.
Core inflation, which excludes more volatile elements such as food and fuel, decreased slightly to 3.1%. Meanwhile, inflation in the services sector — a major part of the economy — slowed to 4.4%, down from 4.5% in December. These metrics are closely monitored by the Bank of England as it sets interest rates aimed at controlling economic growth and inflation.
Following the release of the inflation data, financial markets showed increased confidence in the prospect of an interest rate cut at the Bank of England’s upcoming meeting in March. Traders now assign an 86% likelihood to a base rate reduction, potentially from the current 3.75% to 3.5%, with many predicting a further cut to 3.25% by September. This would be a boon for borrowers, prospective homebuyers, and those looking to remortgage.
Mixed Impact for Savers
While borrowing costs may become cheaper, savers may face challenges. Analysts caution that the potential lowering of interest rates could push down returns on savings accounts further. Alice Haine, a personal finance analyst at Bestinvest, advised savers to seek out the highest rates available while they can, noting:
"With further rate cuts expected in 2026, savings rates are likely to drift lower."
Household Energy Bills Set to Fall From April
In another piece of good news for consumers, annual household energy bills are expected to decrease by an estimated £117 starting in April. This projection follows government measures announced in the recent budget, which, according to research by Cornwall Insight, will bring typical dual-fuel household bills down to £1,641 per year. This represents approximately a 7% reduction from the current price cap level of £1,758, valid until the end of March.
If realized, this will mark the lowest annual energy cost for households since July 2024, offering significant relief amid ongoing concerns about energy affordability.
Other Economic Updates
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John Lewis & Waitrose Pay Increase: From 1 April, staff at John Lewis and Waitrose will receive a 6.9% pay rise. Employees on the shop floor will see their minimum hourly pay increase to £13.25 nationwide, with those within the M25 area earning at least £14.80. This equates to an annual rise of about £1,600 for a typical full-time employee.
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FTSE 100 Hits New Record: Reflecting investor optimism coinciding with the inflation drop, the FTSE 100 index has reached an all-time high, climbing over 1% on the day. It has outperformed major US indices so far this year, gaining 5.6%, while the S&P 500 and Nasdaq have lagged.
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Bank Switching Incentives: NatWest has unveiled a new offer giving £150 to customers who switch accounts using their Current Account Switch Service by 28 May, coupled with a competitive savings rate of 7% AER for one year on balances up to £5,000. – Employment Law Changes: From today, several trade union-related legal reforms have taken effect, easing restrictions on union activities and strengthening employee protections during industrial action. Further employment law changes, including enhanced whistleblower protections and adjustments to statutory sick pay, are set to commence from 6 April.
Looking Ahead
The latest data signals a cautiously optimistic outlook for the UK economy. Lower inflation and anticipated interest rate cuts could support increased consumer spending and borrowing. Meanwhile, relief on energy bills will ease costs for households, potentially boosting disposable income.
However, savers might need to adapt to a climate of reduced returns on savings, making it crucial to seek competitively yielding accounts.
For consumers and businesses alike, the coming months promise shifts in financial conditions and policy measures that will shape economic activity through 2026. —
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