3.0% CPI, 5.28% Mortgages, and an MPC That Can't Cut: Where UK Inflation Stands Before Tomorrow's Decision

The ONS reported CPI at 3.0% for the 12 months to January 2026, down from 3.4% in December. On a monthly basis, prices actually fell by 0.5% — the sharpest January drop in recent years.

The headline figure tells an encouraging story. The detail tells a more complicated one.

Core CPI — stripping out volatile food and energy — fell only marginally, from 3.2% to 3.1%. Services inflation, the metric the MPC watches most closely, ticked down from 4.5% to 4.4%. That is still more than double the 2% target.

The biggest downward push came from transport — motor fuel prices dropped 2.2% year-on-year as petrol fell to 133.2p per litre. Air fares also unwound their December spike. Food inflation eased from 4.5% to 3.6%, with bread, cereals, and meat leading the decline.

But look at the other side: restaurants and hotels climbed from 3.8% to 4.1%. Communications rose from 4.2% to 4.6%. Health costs jumped from 2.1% to 3.1%. The disinflation story is real, but it is uneven — and the stickiest categories are the ones that matter most for everyday spending.

When the MPC voted 5-4 to hold at 3.75% on 4 February, Governor Bailey called a March cut a "genuinely open question." Two weeks of geopolitical chaos have closed that question.

Oil near $110 a barrel changes the maths entirely. The Bank of England noted in its February minutes that CPI was "expected to fall back to around the target from April, owing to developments in energy prices." That expectation assumed Brent in the $75-85 range. At $110, the April Ofgem price cap recalculation could reverse months of energy disinflation, and the second-round effects on food, logistics, and manufacturing costs are already visible in mortgage pricing.

Two-year fixed rates at 5.28% tell you what the market thinks: the BoE is not cutting soon. That represents a £800 annual increase on a typical mortgage compared to deals available at the start of March. Five-year fixes at 5.32% are at their highest since February 2025.

The four dissenters who voted for a cut to 3.50% in February were responding to the domestic picture: GDP flatlined in January, unemployment is rising, and wage growth at 4.2% is finally easing. Their argument — that monetary policy is already restrictive enough — has merit. But the global energy shock has forced even doves to reconsider. Market consensus overwhelmingly expects a hold tomorrow.

Long-term UK gilt yields averaged 4.43% in February 2026, according to FRED data. They have been remarkably stable — hovering between 4.43% and 4.50% for three months — despite the dramatic shift in near-term rate expectations.

This stability is telling. The bond market is not pricing in runaway inflation; it is pricing in "higher for longer." Gilt investors expect the BoE to eventually resume cutting, but not until the geopolitical premium dissipates and services inflation breaks below 4%.

For borrowers, this means mortgage rates are unlikely to fall materially in 2026. Lenders price off swap rates, which track gilt yields, and swaps are pricing Bank Rate at roughly 3.50% by year-end — just one more cut from here. Anyone waiting for sub-4% fixed deals is likely waiting until 2027.

For savers, the picture is more nuanced. Easy-access rates remain attractive at 4.5%+ because banks need deposits and are competing aggressively. But this is a feature of monetary tightness, not generosity — and it will fade once the BoE does resume cutting.

Oil at $110 is not an abstract market event. It flows through to petrol prices within days, to energy bills within months, and to food prices within a quarter.

The Ofgem energy price cap reset in January to £1,758 annually for a typical dual-fuel household — barely changed from the previous quarter. The April reset was expected to fall further, potentially below £1,700. That is now in doubt. If wholesale gas prices follow oil higher, April's cap could instead rise, wiping out what would have been the first meaningful relief for households since the energy crisis began in 2022.

Petrol has already started climbing from its January low of 133.2p per litre. If oil sustains $110, forecasters expect petrol to test 150p per litre — comparable to the spring 2024 spike that preceded the last inflation uptick.

This is the scenario that keeps MPC members awake. Domestic inflation was finally on a downward trajectory. Services inflation was easing. Wage growth was moderating. Then an external shock — entirely outside the BoE's control — threatens to reignite the very pressures they spent two years fighting.

Mortgage holders and buyers: Do not wait for rates to fall before acting. If you are within six months of your fixed deal expiring, start locking in now — most lenders allow you to secure a rate up to six months ahead. The current 5.28% two-year fix is painful, but it could look generous if oil stays elevated. If you are on a tracker or SVR, you benefit from any future cut, but you are exposed to the risk that the BoE holds for longer than expected.

Savers: This is the best savings environment in 15 years. Easy-access accounts above 4.5% exist precisely because the BoE is holding firm. Use it. Your ISA allowance of £20,000 resets on 5 April — you have 18 days. A Cash ISA paying 4%+ shelters interest from tax permanently. For higher-rate taxpayers paying 40% on savings interest, the tax saving alone is worth hundreds.

Anyone watching their weekly shop: Food inflation at 3.6% means your grocery bill is still rising, just more slowly. The ONS noted bread, cereals, and meat leading the decline, but coffee and cocoa remain elevated. If oil drives transport costs higher, expect supermarket prices to follow with a 2-3 month lag.

The practical takeaway: tomorrow's MPC hold changes nothing immediately, but it signals that the "rescue cuts" many borrowers hoped for are not coming in 2026. Build your financial plans around rates staying roughly where they are — and you will be pleasantly surprised if they don't.

For more on how rates affect your mortgage, see our mortgage rates guide. For savings strategy in the current environment, visit our savings hub.

This article is for informational purposes only and does not constitute financial advice. You should seek independent financial advice before making any investment decisions.