FTSE 100 Surge: Is the Inflation Break a One‑Shot Rally or New Trend?

• FTSE 100 climbs 0.99% to 10,660.90 after CPI data.
• UK CPI eases to 3% YoY – the lowest since March 2025.
• Mining giants Glencore, Anglo American, Rio Tinto rally 1.5‑4%.
• Banking names HSBC, Barclays, NatWest gain 1.8‑2.3%.
• Defense leader BAE Systems jumps 3.25% on a 12% profit lift.
• Core inflation softens to 3.1%; output‑price inflation falls to 2.5%.

You missed the CPI surprise, and the FTSE 100 is already rewarding the latecomers.

Why FTSE 100’s Inflation‑Driven Rally Deserves Your Attention

The Office for National Statistics reported a 3% annual rise in the consumer price index for January – a ten‑month low that matches market expectations. The drop in headline inflation reduces pressure on the Bank of England to hike rates further, unlocking equity valuations across the board. For investors, the key question is whether this dip is a temporary bounce or the start of a sustained easing cycle that could lift earnings multiples.

Mining Stocks Lead the Charge: Glencore, Rio Tinto, Anglo American

Mining shares outperformed the broader market, with Glencore up 2.75% despite a weaker full‑year earnings report. The rally was driven by three factors:

• Commodity price resilience: Copper and iron‑ore prices have steadied after a volatile 2025‑2026 cycle, supporting cash flow.
• Currency dynamics: A softer pound improves export competitiveness for UK‑listed miners.
• Cost‑inflation decoupling: Output‑price inflation fell to 2.5%, indicating that producers can pass lower input costs to customers.

Peers such as Rio Tinto (up 1.5%) and Anglo American (up 2.75%) are echoing the same sentiment, suggesting a sector‑wide shift from defensive positioning to growth‑oriented buying.

Banking & Defense: The Dual Engine of UK Equities

Banking stocks rallied 1.5‑2.3% as lower inflation eases expectations of tighter monetary policy. A more benign rate outlook improves net interest margins (NIM) outlook, especially for HSBC and Barclays, which have sizable overseas exposure. NatWest and Lloyds also benefit from a softer cost‑of‑funds environment, which can boost loan growth without eroding credit quality.

On the defense side, BAE Systems surged 3.25% after announcing a 12% rise in full‑year operating profit and raising dividend payouts. The company’s backlog of contracts with the Ministry of Defence remains robust, and the earnings beat highlights how defense spending can act as a counter‑cyclical driver when consumer sentiment softens.

Sector‑Level Trends: What Global Peers Like Tata Steel and Rio Tinto Are Doing

While UK miners are rallying, global peers are also reacting to the inflation narrative. Tata Steel, for instance, posted a modest profit improvement after leveraging lower raw‑material costs, mirroring the output‑price inflation trend seen in the UK. Rio Tinto’s European‑listed shares have followed a similar trajectory, reinforcing the idea that lower input‑price inflation is a worldwide catalyst for resource stocks.

In the banking arena, European banks such as Deutsche Bank and BNP Paribas are experiencing comparable price‑recovery dynamics, underscoring that the UK move is part of a broader Euro‑zone moderation in price pressures.

Historical Lens: How Past Inflation Lows Shaped the FTSE

Looking back to the March 2025 CPI dip (2.6% YoY), the FTSE 100 responded with a 1.3% rally over the following month, followed by a gradual consolidation as investors digested the new rate outlook. A similar pattern emerged after the 2022 post‑pandemic inflation peak, where a 0.8% CPI decline sparked a short‑term equity surge before a period of volatility.

The recurring theme is that inflation easements often trigger an immediate equity bump, but the durability of the move hinges on whether the central bank adjusts its policy curve. If the Bank of England signals a pause or cut, the FTSE could sustain the upward drift; if it remains hawkish, the rally may be short‑lived.

Key Technical and Fundamental Metrics Explained

• Consumer Price Index (CPI): Measures the average change over time in the prices paid by consumers for a basket of goods and services.
• Core Inflation: CPI stripped of volatile items like energy and food; a better gauge of underlying price trends.
• Output‑Price Inflation: The rate at which producers can raise prices for finished goods, indicating pricing power.
• Net Interest Margin (NIM): The difference between interest earned on loans and interest paid on deposits; a critical profitability metric for banks.
• Backlog: The value of contracted work yet to be delivered, crucial for defense firms like BAE Systems.

Investor Playbook: Bull vs. Bear Scenarios for the FTSE 100

Bull Case

• Continued CPI moderation pushes the Bank of England to pause or cut rates.
• Lower input‑cost inflation sustains profit margins for miners and industrials.
• Defence spending remains elevated, supporting BAE Systems and related suppliers.
• FTSE 100 trades above 10,800, unlocking higher valuation multiples for dividend‑yielding stocks.

Bear Case

• Unexpected spikes in energy or food prices reignite headline inflation.
• The Bank of England adopts a more hawkish stance, compressing NIMs.
• Commodity price weakness erodes mining earnings, dragging the index down.
• FTSE 100 retreats below 10,400, triggering stop‑losses and risk‑off flows.

Positioning now—whether through sector‑focused ETFs, selective stock picks, or defensive dividend plays—can capture the upside while protecting against a potential reversal.