The Organisation for Economic Co-operation and Development has projected that the UK will endure the highest inflation rate among G7 economies in 2025, with consumer price growth reaching approximately 3.5%. Soaring food costs and higher employer national insurance contributions are major contributors. While the UK is expected to grow by about 1.4% this year, much of that momentum is draining, and the forecast for 2026 drops sharply to 1.0%, largely due to fiscal tightening and rising trade expenses.
Although inflation is predicted to cool to around 2.7% in 2026, that level still far exceeds the Bank of England’s target of 2.0%. Key inflation pressures include increasing regulated prices in utilities, persistent wage growth, and costs passed to businesses from supply‐chain and trade disruptions. Meanwhile, tighter government fiscal policy—through tax hikes and spending cuts—is expected to put a brake on consumption and investment.
External headwinds also loom. Rising trade costs and global uncertainty are expected to further erode business confidence and dampen exports. As households grapple with elevated living costs, the squeeze on disposable income could worsen, particularly if wage growth fails to keep pace with inflation. For policymakers, the challenge will be to balance inflation control without tipping the UK into a sharper slowdown.
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