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.

The ONS said transport and hospitality prices helped to drag down inflation last month.

Economists said the numbers added to signs that inflation was on course to fall further from its peak last year but could also be heralding the recession expected for Britain's economy in 2023.

And while the rate of inflation for food and non-alcoholic drinks slowed to 16.7%, this was barely less than the 45-year record of 16.8% struck in December, little comfort for households experiencing a severe cost-of-living squeeze.

ONS estimates for inflation by income group suggested the poorest suffered inflation rates above 15% in late 2022.

"With energy and food prices remaining stubbornly high, poorer households continue to face far higher living costs than richer families," said James Smith, research director at the Resolution Foundation think-tank.

(Reporting by Andy Bruce; Editing by William Schomberg and Helen Popper)