The latest inflation report reveals a resurgence in price pressures, with the consumer price index rising by 3.0 percent in January on a year-over-year basis, up from 2.5 percent in December 2024 and 0.2 percentage points above the consensus. This acceleration is primarily driven by core inflation, which excludes volatile items such as energy and food, increasing to 3.7 percent from 3.2 percent. The service sector continues to exert upward pressure, with CPI services inflation rising from 4.4 percent to 5.0 percent, indicating persistent cost pressures in labour-intensive industries.

Despite the annual increase, monthly CPI fell by 0.1 percent, a reversal from December's 0.3 percent rise. This suggests a short-term reprieve, likely influenced by weaker seasonal demand. The CPI, including owner-occupiers' housing costs (CPIH), climbed 3.9 percent, with transport and food costs being the primary inflationary drivers, while housing and household services provided some relief.

A more concerning trend is the steady rise in core CPIH, which rose 4.6 percent, reflecting sustained underlying inflationary pressures. The divergence between goods and services inflation, with services inflation nearly six times higher, signals persistent cost-push factors that could challenge monetary policy decisions in the coming months. The latest update takes the UK RPI to 20 and RPI-P to 6. This means that economic activities are generally ahead of market expectations of the UK economy.

UK annual inflation is seen at 2.8 percent in January versus 2.5 percent in December. Month on month, the consensus looks for a decline of 0.3 percent after rising by 0.3 percent in December.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. Inflation is an increase in the overall price level of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.