Inflation rose by a higher than expected 3% in the 12 months to January, up from 2.5% in December, according to latest data from the Office for National Statistics.
The jump was attributed to rising food and drink costs, petrol prices, airfares and the removal of the VAT exemption on school fees. Core inflation, which strips out more volatile food and energy prices, increased to 3.7% in January, up from 3.2% in December, while services inflation rose to 5%, up from 4.4% in December.
Meanwhile, the Retail Prices Index (RPI) measure of inflation, which includes housing costs, edged up to 3.6% in the 12 months to January, up from 3.5% in December.
Sarah Coles, head of personal finance, Hargreaves Lansdown said: “Inflation is back to behaving like a caffeinated flea, bouncing higher in January, after December’s bigger-than-expected fall. The bounce was even bigger than the market had expected, so while it’s not going to set off a cacophony of alarm bells at the Bank of England, it’s not going to make them any more enthusiastic about rate cuts in the immediate future either.
“Private school fees have played their part. January saw the VAT exemption on the fees disappear, and while schools weren’t required to pass the cost on, it seems as though parents have borne the brunt of the change. The annual inflation rate for education was 7.5% – up from 5.0% in December. This was entirely driven by a 12.7% rise in private school fees during the month.
“Petrol prices helped push inflation up, with the average price of petrol up 0.8 pence per litre between December 2024 and January 2025, and diesel prices up 1.5 pence per litre. Petrol prices are still down over the year, but less so than a year earlier.
“Airfares also took a toll. They tend to rise in December and then fall back in January, but the movements were more muted this year – which meant the January figure fell less than it usually does. This may not reflect any major change in the market, because the December figures were drawn on days that are typically cheaper anyway – Christmas Eve and New Year’s Eve.
“Food and drink prices also fed inflation – up 3%. Poor harvests in a number of areas have pushed up the prices of trolley favourites, including olive oil at 16.6% and chocolate at 14.4%. Butter is also up 18.3% thanks to bad weather reducing milk supplies. This is partially offset by price falls elsewhere – with annual drops in the price of everything from rice and pasta to margarine. However, with the threat of higher wage costs for supermarkets and producers, there’s every chance this isn’t the last we’ve seen of food inflation in 2025.”
You can learn about ways you might be able to reduce the cost of your food bills in our guide 21 ways to save money on your food bills.
What inflation means for you
When inflation rises, this pushes up the cost of living for households making it more difficult for those on low incomes to make ends meet. News that it has risen to 3% in the year to January is therefore unwelcome, especially as it is creeping further away from the government’s 2% target.
Wage growth continues to outstrip the rate of inflation, with average weekly earnings excluding bonuses at 5.9% higher in the three months to January compared to the same period a year earlier.
Inflation and your pension
September’s inflation number is usually considered the most important inflation rate of the year for those reliant on the State Pension. That’s because the increase in prices over the year to this point is usually used to calculate the rate at which certain allowances and benefits, including the State Pension, are increased the following April.
Under the ‘triple lock’ guarantee, the State Pension is guaranteed to rise by the highest of September’s inflation figure, earnings growth, or 2.5%. Earnings figures for the three months to July are used for the yearly increase, and given that these stood at 4.1%, that means that the State Pension is due to increase by this amount next April, meaning an annual rise of around £473 for those receiving the new State Pension and £361 for those on the basic State Pension. You can find out more about this in our guide What is the pension triple lock?
However, January’s inflation figures will still have an impact on pensioners, who often have to get by on low incomes.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Thanks to wage rises, if you’re working, you might have some breathing room in your budget to absorb rising prices. However, if you’re retired, you might have considerably less wiggle room to work with – especially if you’re on a fixed income.
“The good news is that if you’re in the market for a guaranteed income, annuities are offering good value right now. The most recent data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,490 per year from a single life, level annuity with a five-year guarantee.
“However, our recent experience of high inflation still looms large in many people’s minds and more people will consider how to inflation-proof this income, so its purchasing power is preserved. This comes at the cost of a lower starting income though. Someone looking for an annuity escalating at 3% per year (single life, five-year guarantee) can get an income of up to £5,412 per year. It’s important to weigh up the pros and cons. It is a lower starting income, but over time it will rise. You need to work out roughly how long it will take before the income rises to match the level annuity and whether you’ve got other assets that you can use to buffer your income in difficult times.
“It’s an important decision and it pays to do your homework and use an annuity search engine to get quotes from across the market. Once bought, an annuity cannot be unwound, so doing your research now means you can get the best annuity for your needs.”
If you want to learn more about the impact of inflation on your retirement savings, read our article How does inflation affect my pension?
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
What does it mean for interest rates?
The Bank of England raised the base rate fourteen consecutive times since December 2021 to try to dampen inflation, and made its first base rate reduction for over four years in August 2024, taking the rate from 5.25% to 5%. This was followed by a further quarter point cut in November 2024 and another in February 2025, which means the base rate is currently at 4.5%.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, the online investment platform, said: “Bank of England Governor Andrew Bailey has indicated that the central bank is still on track to cut interest rates again this year despite robust pay growth and an expected ‘short-run hump’ in inflation. But the higher-than-expected figure may complicate their decision as lacklustre economic growth in the second half of last year along with Chancellor Rachel Reeve’s raft of tax hikes for businesses, which exacerbated the dampening effect, has dealt a heavy blow to business and consumer sentiment in recent months.
“The inflation outlook from here is far from rosy. Employers have raised concerns that the hike in National Insurance rates on employee salaries along with the increase in the minimum wage and the reduction in business rates relief from April could prove inflationary as businesses look to pass on rising costs to consumers.”
If interest rates remain higher for longer, this is likely to hit homebuyers and homeowners hard, with many already struggling to manage steeper costs.
Ben Thompson, deputy chief executive of the Mortgage Advice Bureau said: “Inflation increasing is never great for borrowers. However, the good news is mortgage pricing has been on a downward trend since the Bank of England’s decision to cut interest rates earlier this month. This means the rates available now are likely to be considerably lower for those who took out two-year fixes during the 2023 peak. Speaking with an advisor and getting mortgage ready remains crucial to securing the best possible deal.”
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
If you’re worried about a potential payment shock when your current mortgage deal ends, read our articles When is the best time to remortgage? and Are you one of 1.6m homeowners facing a mortgage timebomb?
Impact on savers
If you’re trying to save so that you have a financial buffer in place to cover rising costs, our articles How to build an emergency fund and Best instant access savings accounts may come in handy. Fortunately, savings rates remain competitive, so there are still some good rates to be found. Craig Rickman, Personal Finance Expert at interactive investor, said: “As inflation races away from the UK’s 2% target, it offers a timely reminder to investors and savers to make sure their money is working as hard for them as possible. If inflation outpaces the return you receive, your wealth will erode in real terms. If not kept in check over long periods, this can have a punishing impact on your financial future.
“With tax year end fast approaching, one simple task is to fight inflation to make sure you’re using the most of your tax wrappers, such as pensions and ISAs. Paying less is one of the most effective ways to guard against the impact of price rises as it means you get to keep more of any growth and income, helping your money to grow faster.”
You can learn more about inflation and the impact it has on your finances in our guide What does inflation mean for my money? If you’re looking for ways you might be able to reduce your outgoings, read our articles How to save money – 21 money saving tips and Seven ways to save on your household bills.
Free financial support services
Millions of people are struggling financially at the moment, and although inflation is easing, many are still finding it difficult to manage their outgoings.
If your debts are starting to spiral out of control, contact Citizens Advice to help you find a way forward. You can speak to an advisor through its national phone service Adviceline on 0800 144 8848 if you’re in England, 0800 702 2020 if you’re in Wales, 0800 028 1456 if you’re in Scotland and 0808 223 1133 if you’re in Northern Ireland. Alternatively, contact any of the following specialist debt advice charities:
- National Debtline (telephone 0808 808 4000)
- Debt Advice Foundation (telephone 0800 043 4050)
- StepChange (telephone 0800 138 1111)
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