The UK Retail Price Index (RPI) fell by 0.5% month on month in January. This was below the forecast of a 0.4% fall.
The January retail price index showing a drop of -0.5% is a bigger fall than the -0.4% we were expecting. This suggests that inflationary pressures in the UK are cooling faster than anticipated. This immediately strengthens the case for the Bank of England to consider cutting interest rates sooner than previously priced in.
Rates Market Implications
We should now look at interest rate swaps and SONIA futures, expecting the front end of the curve to rally. The market is now pricing in nearly a full percentage point of rate cuts for 2026, a significant jump from the 75 basis points priced in just last week. This data solidifies the view that the first cut could come as early as May.
For currency traders, this weaker inflation print puts downward pressure on the British pound. We see a stronger case for shorting GBP against the dollar, especially as the Federal Reserve appears to be on a slower easing path. This is reflected in the options market, where the premium on three-month GBP/USD put options has increased by over 5% this morning.
This environment is generally positive for UK equities, which benefit from the prospect of lower borrowing costs. The FTSE 250 index, which is more exposed to the domestic UK economy, is likely to outperform the more international FTSE 100. We would consider buying FTSE 250 call options to gain upside exposure while limiting risk.
We must remember this report follows the very weak 0.1% GDP growth figure we saw for the final quarter of 2025. When combined, the data paints a clear picture of a slowing economy where inflation is no longer the primary concern for policymakers. This is a significant shift from the narrative we followed for most of last year.
