Gaya says it has so far absorbed price increases because high-end bakeries in London won’t switch to cheaper ingredients, which has led to lower profits.
January sales also helped household finances, with the British Retail Consortium (BRC) pointing to “big discounts” on clothing, shoes and furniture.
The trade association pointed out that prices of major daily necessities such as bread, cereal, and rice will also fall.
BRC chief economist Harvir Dhillon said: “It reflects the fierce competition among retailers as they continue to try to absorb higher costs where possible to keep prices low for customers.”
But it warned there was a risk that retailers would be unable to curb future price increases due to government policies such as higher minimum wages, higher national insurance premiums and employment rights laws.
Wednesday’s drop in inflation raises the possibility that the Bank of England will cut its benchmark interest rate, currently set at 3.75%, due to slower wage growth.
And economists expect inflation to fall further in the coming months as the government cuts household energy bills from April. Forecast specialist Cornwall Insight predicted the bill would help lower the energy price cap for the average household from £117 to £1,641 from April.
“Given the favorable inflation outlook, the bank is expected to cut interest rates three times this year, keeping rates at 3% until the end of 2026,” said Yael Selpin, chief economist at KPMG.
The Institute of Chartered Accountants in England and Wales (ICAEW) said figures released on Wednesday showed the fight against soaring prices “took a decisive turn for the better in January”.
“These numbers make a spring rate cut look almost certain,” said Suren Thiru, economics director at ICAEW. “Questions remain among policymakers about whether to cut rates in March or April as some may want a little more evidence of inflation easing before cutting rates.”
Simon French, chief economist at Panmure Liberum, said there was currently about an 80% chance the Bank of England would cut interest rates in March.
He told the BBC’s Today program that the bank’s vote at its last meeting to keep interest rates at 3.75% was so finely divided that it would only take “a little more evidence” of a slowing inflation to “change the vote for one of its members”.
He added that one of the reasons inflation has fallen so slowly is because of Reeves’ 2024 budget. In this budget she increased employers’ national insurance contributions, which French said led to higher prices for consumers.
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