The Statistical Illusion of Disinflation
The numbers arrived at dawn. Food prices fell. Supply chains healed. The headline Consumer Price Index (CPI) print looked like a victory for the Bank of England. But the celebration is premature. Beneath the surface of the Office for National Statistics data, a structural rot persists. Services inflation is not moving. It is entrenched. It is the real driver of monetary policy, and it is currently mocking the market’s optimism for a March rate cut.
Today’s data release confirms a dangerous divergence in the British economy. According to the latest figures, food inflation plummeted in January, providing much-needed relief to households. However, the service sector, which accounts for approximately 80% of UK economic output, remains a fortress of price pressure. The Bank of England (BoE) is now trapped between a slowing headline rate and a core services component that refuses to yield. The markets are pricing in a pivot. They are likely miscalculating the Governor’s resolve.
The Food Price Mirage
Supermarket aisles are finally seeing the end of the 2024-2025 price surge. Wheat, corn, and fertilizer costs have normalized globally. This has trickled down to the retail level with surprising speed. Per the latest Bloomberg market data, the basket of essential goods has seen its slowest growth rate in three years. This is a supply-side correction. It is not evidence of successful monetary tightening. Food prices are volatile and mean-reverting. They are the distraction, not the signal.
Central bankers know this. They look for the ‘sticky’ elements of the economy. When food prices drop, it pulls the headline CPI lower, creating a political win for the government. But for the Monetary Policy Committee (MPC), the focus remains on the domestic inflationary engine. That engine is still running hot. The divergence between goods and services is now at its widest point in the current cycle. Relying on falling milk prices to justify a rate cut is a gamble that Andrew Bailey might not be willing to take.
The Services Sector Fortress
Service sector inflation is the true measure of domestic heat. It is driven by wages, rents, and insurance premiums. These are not easily reversed. The Office for National Statistics reported that services inflation held steady at 5.8% this morning. This is nearly triple the BoE’s 2% target. It suggests that the ‘second-round effects’ of the previous year’s wage hikes are now fully embedded in the pricing models of British firms.
The technical mechanism here is simple but devastating. As workers demanded higher pay to combat the 2024 cost-of-living crisis, firms raised prices to protect margins. This creates a feedback loop. Until wage growth cools significantly, service prices will remain elevated. Current data shows private sector regular pay growth is still hovering around 5.5%. This is inconsistent with a 2% inflation target. The BoE is staring at a structural problem that a few months of cheaper groceries cannot solve.
Visualizing the Inflation Gap
UK Inflation Components Comparison February 2026
The MPC Split and the March Threshold
The Bank of England’s leadership is far from a monolith. The recent voting patterns within the MPC reveal a three-way split. One faction is desperate to cut rates to avoid a recession. Another is terrified of a 1970s-style inflation resurgence. The third is waiting for ‘clear and convincing’ evidence that services have broken. Today’s data provides fodder for both the hawks and the doves, which usually results in the status quo being maintained.
ING Economics has suggested that cuts in March and June remain on the table. This seems optimistic. While the headline figure might dip toward 3% in the coming weeks, the ‘super-core’ measures preferred by the BoE are not showing the same downward trajectory. If the MPC cuts too early, they risk a currency sell-off. A weaker pound would immediately import more inflation, undoing the progress made on the goods side. It is a razor-thin margin for error.
| Category | January 2026 (%) | December 2025 (%) | Trend |
|---|---|---|---|
| Headline CPI | 3.4 | 3.8 | Down |
| Food & Non-Alcoholic | 2.1 | 4.5 | Sharp Drop |
| Services | 5.8 | 5.9 | Sticky |
| Core CPI | 4.2 | 4.4 | Slow Decline |
The Global Context
The UK does not exist in a vacuum. The Federal Reserve and the European Central Bank are facing similar dilemmas, though the UK’s labor market remains uniquely tight. Per Reuters reporting, the ‘higher for longer’ narrative is gaining renewed traction in Washington. If the Fed stays put while the BoE cuts, the interest rate differential will crush Sterling. The Bank of England is not just fighting domestic prices, it is fighting global capital flows.
The technical reality is that the UK’s inflation problem is more ‘baked in’ than its peers. The combination of post-Brexit trade frictions and a shrinking workforce has created a floor for inflation that didn’t exist a decade ago. This is why the 5.8% services figure is so alarming. It suggests the floor is much higher than the 2% target. The central bank’s credibility is on the line. They cannot afford a false start.
Watch the March 19, 2026 Monetary Policy Committee vote. The key data point will not be the headline CPI, but the internal wage growth projections for the second quarter. If the MPC sees any sign that the spring pay rounds are coming in above 5%, the March cut will be off the table. The market is betting on a pivot, but the services sector is still screaming for restraint.
