Households in the UK are anticipated to experience the most significant inflation among the world’s seven largest economies this year and the next, according to the International Monetary Fund. The IMF revised its forecasts for the UK, projecting a steeper increase in prices for both years compared to previous estimates in July. This development is likely to dampen the prospects of a rate cut by the Bank of England in the near future, posing challenges for borrowers while benefiting savers.
While the IMF raised its economic growth forecast for the UK this year, it lowered the estimate for the following year due to concerns surrounding the job market, presenting a setback for Chancellor Rachel Reeves and the Labour party ahead of the upcoming budget. The latest update coincided with a gathering of prominent politicians and central bank leaders in Washington DC.
Recent data from the Office for National Statistics indicated that inflation remained at 3.8% in July and August, reaching the highest levels since January 2024. The IMF now predicts UK inflation to average 3.4% in 2025, up from its earlier projection of 3.2%. Although a slowdown to 2.5% is forecasted for next year, it remains higher than the initial 2.3% prediction.
This means that UK households are poised to face the highest inflation rate among the G7 advanced economies over the upcoming two years, including countries like Canada, France, Germany, Italy, Japan, and the US. The situation poses a significant challenge for the Bank of England as it strives to bring inflation back to the desired 2% target rate.
Pierre-Olivier Gourinchas, the IMF’s chief economist, emphasized that many inflation drivers are deemed temporary, such as spikes in water bills and transportation costs. While the IMF expects these factors to moderate in the future, there are still potential upside risks, including rising labor costs and inflation expectations.
In terms of economic growth, the UK is expected to grow by 1.3% this year, showing improvement from the previous IMF forecast of 1.2%. However, the growth prediction for the next year has been revised downward from 1.4% to 1.3% due to global trade pressures that could impact various economies.
The IMF’s report also highlighted adjustments in growth projections for other countries, with Canada and France experiencing reductions while the US saw a slight increase in its forecast. Global growth for this year has been upgraded to 3.2%, reflecting the resilience of many economies in the face of tariff pressures.
Chancellor Rachel Reeves expressed optimism about the UK’s growth prospects, citing the country’s leadership in G7 growth in the first half of the year and an increase in average disposable income since the election. However, concerns remain about the UK’s inflation challenges and the potential impact on economic growth and monetary policy decisions.