Inflation slowed for the third month in a row in January, raising hopes that further interest rate hikes could be put on hold.
The rate dropped to a better-than-expected 10.1 percent last month amid falling transport costs in a further sign that the cost-of-living crisis has passed its peak.
It means prices are still rising, but at a slower rate than in December when the rate was 10.5 percent.
The latest figure marks a further welcome decline from the eye-watering peak of 11.1 percent seen last October, caused by soaring energy prices, and may see the Bank of England take its foot off the pedal with further big interest rate rises.
But with inflation still in double digits and the rate near 40-year highs, households are yet to feel the pressure ease.
The Office for National Statistics said food price inflation remained at its highest level for 45-years, at 16.8 percent in January, with the cost of everyday essentials still ramping up.
The stubbornly high rate could also tie Jeremy Hunt’s hands when the Chancellor delivers his much-anticipated Budget on March 15. He is less likely to include attractive measures with inflation still in double digits.
Mr Hunt said there is much more to be done in the battle to tame inflation. “While any fall in inflation is welcome, the fight is far from over,” he said.
“High inflation strangles growth and causes pain for families and businesses – that’s why we must stick to the plan to halve inflation this year, reduce debt and grow the economy.”
The ONS said falls in passenger fares contributed to the drop in inflation, with air tickets seeing the largest fall. Air fare annual inflation soared to 44.1 percent in December, but more than halved to 18.4 percent in January, the figures show.
Road transport fares such as coach travel also declined sharply, with inflation at 5.7 percent, down from 11.3 percent, while bus fares also eased, thanks largely to the £2 cap on single bus fares, which came into effect in England from January 1.
Motor fuel prices helped further slow the pace of inflation, with average petrol prices falling 5.9p a litre between December and January to stand at 149.4p per litre last month – the lowest since February 2022.
The Bank of England has said it believes CPI will fall sharply later this year, with governor Andrew Bailey recently saying there has been a “turning of the corner” on inflation.
It said this is due to falling fuel prices and as supply chain difficulties have eased, while wholesale energy prices have also dropped significantly since the painful costs seen last year.
The Bank is forecasting inflation to fall to around four percent towards the end of this year.
It raised interest rates from 3.5 percent to four percent in February and there has been speculation that may have been the last hike due to the lower inflation outlook.
Economist Julian Jessop, said: “At 10.1 percent in January, headline inflation is obviously still far too high, but it is moving in the right direction, with some encouraging signs in the detail too.
“The Bank of England can now take a breath and keep interest rates on hold.”
Meanwhile, a leading think tank has said the Chancellor could reduce inflation if he extended the government’s £2,500 energy price guarantee beyond April.
Despite Treasury denials, the Resolution Foundation said it was likely that the chancellor would use next month’s budget to announce that he would not go ahead with the £500 price cap rise due to come into effect in April.
It said that a move to scrap the rise would not only avoid a rise of up to 22 percent in energy bills between April and June but would also help to meet Rishi Sunak’s pledge to halve inflation by the end of the year.
Latest projections from the energy analyst Cornwall Insight suggest that wholesale prices are likely to fall by July.
This, the Resolution Foundation said, would limit the cost to the Treasury of the price guarantee.
It estimated that keeping it at £2,500 would cost the Treasury an additional £3 billion, but said this was still less than the expected £12.8 billion cost of the scheme at the time of the autumn statement in November.
Torsten Bell, chief executive of the Resolution Foundation, said: “The point of government policy during this crisis has been to smooth consumers through the worst of the energy price shock. But now the policy [of a £500 increase] isn’t smoothing prices, it’s causing the spike.”