The UK Retail Price Index (RPI) rose by 3.8% year on year in January. This was below the forecast of 3.9%.
The result was 0.1 percentage points under expectations. It indicates a slightly lower annual RPI inflation rate than predicted for the month.
Inflation Trend And Policy Outlook
The January RPI figure coming in slightly below forecast at 3.8% reinforces the view that inflation is on a firm downward path. This continues the trend we observed throughout 2025, when the headline rate fell consistently from above 5%. We now see an increased probability that the Bank of England will move to cut interest rates sooner than previously expected.
In response, we are seeing the front end of the curve react, with Short Sterling or SONIA futures for the second quarter gaining ground. The market is now pricing in a near 80% probability of a 25 basis point cut by the May Monetary Policy Committee meeting, up significantly from around 60% last week. This makes positioning for lower yields through interest rate derivatives an increasingly popular trade.
Gilt futures are a direct beneficiary of this sentiment, and we expect further upward momentum in the coming weeks. The 2-year Gilt yield, which is highly sensitive to Bank Rate expectations, has already fallen 10 basis points in early trading. We saw a similar dynamic in late 2023 when softer inflation data led to a sharp rally in government bonds.
This prospect of earlier rate cuts is weighing on Sterling. We anticipate the GBP/USD currency pair will struggle to maintain levels above 1.28 as the UK’s yield advantage over the US narrows. Derivative traders should consider buying GBP puts as a straightforward way to position for potential downside in the pound.
Growth Backdrop And Rates Bias
This inflation data does not exist in a vacuum; it comes after Q4 2025 GDP figures showed the economy barely grew at 0.1%. This combination of falling inflation and economic stagnation provides a strong foundation for our view that the Bank will prioritize growth. This gives us confidence that the path of least resistance for UK rates is lower.
