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UK inflation falls to 10.1% in January, less than expected
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Core, services inflation - watched by BoE - slow sharply
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Sterling drops as investors rein in bets on BoE rate hikes
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Low-income Britons still struggling with living costs
(Adds details, recasts)
By Andy Bruce and William Schomberg
LONDON, Feb 15 (Reuters) - British inflation fell by more than expected in January and there were signs of cooling price pressure in parts of the economy watched closely by the Bank of England, adding to signs that further hefty interest rate hikes are unlikely.
Annual consumer price inflation (CPI) cooled to 10.1% last month, the lowest reading since September, the Office for National Statistics (ONS) said on Wednesday.
Economists polled by Reuters had forecast that the annual CPI rate would drop to 10.3% in January, moving further away from October's 41-year high of 11.1% but continuing to squeeze households' living standards.
Despite the fall, inflation remains higher than in the United States or euro zone, and many forecasters think it will stay higher as a result of Britain's acute labour shortages and other constraints on the economy such as Brexit.
British core CPI - which excludes energy, food, alcohol and tobacco - fell to 5.8% in January from December's 6.3%.
Sterling fell against the U.S. dollar and the euro after the data. British government bond prices rose sharply as investors ruled out the chance that the BoE will need to raise interest rates in March by another 0.5 percentage points. Most expect a quarter-of-a-percentage-point raise next month.
Earlier this month, the BoE said it saw signs that the surge in consumer prices had turned a corner and it suggested it was close to ending its run of interest rate hikes.
Prices of services, which are also in the BoE's spotlight, slowed their rise in January, increasing by an annual 6.0% compared with 6.8% in December.
"The Bank of England will be pleased to see that services inflation is starting to subside. They will also be reassured by the latest data indicating that private sector wage growth is easing," said Jake Finney, an economist at PwC.
Data on Tuesday showed strong annual increases in wages but slowing growth over the most recent months.
Finney said he still expected the BoE to raise interest rates by another 0.25 percentage points in March, as do most economists polled by Reuters.
POOREST HIT HARDEST
Finance minister Jeremy Hunt said the government would not relax its guard.
"While any fall in inflation is welcome, the fight is far from over," he said.