Households in the United Kingdom are expected to face the highest inflation rates among the world’s seven largest economies this year and next, according to the latest projection by the International Monetary Fund (IMF). The IMF noted a more pronounced increase in prices for both years compared to its previous forecasts in July. This development is likely to reduce the likelihood of an imminent interest rate cut by the Bank of England, impacting borrowers but benefiting savers.
While the IMF raised its economic growth forecast for the UK this year, it revised down its estimate for the following year due to concerns regarding the job market. This adjustment presents a challenge for Chancellor Rachel Reeves and the Labour Party ahead of the upcoming Budget announcement. The IMF’s update coincided with a gathering of prominent politicians and central bank officials in Washington DC.
Recent data from the Office for National Statistics revealed that inflation stood at 3.8% in July and August, the highest level since January 2024. The IMF anticipates UK inflation to average 3.4% in 2025, up from its previous estimate of 3.2%. Despite a projected slowdown to 2.5% next year, this figure remains higher than the earlier prediction of 2.3%.
The IMF’s forecast indicates that UK households will experience the highest inflation rate among the G7 advanced economies over the next two years, including Canada, France, Germany, Italy, Japan, and the United States. This situation poses a significant challenge for the Bank of England in its efforts to bring inflation back to the target rate of 2%.
Pierre-Olivier Gourinchas, the IMF’s chief economist, highlighted temporary factors driving inflation, such as spikes in water bills and transportation costs. He expects these factors to moderate in the future, although risks remain due to increases in labor costs and inflation expectations.
The UK economy is projected to grow by 1.3% this year, an improvement from the previous IMF forecast of 1.2%, driven by robust growth in the first half. However, the IMF has revised down its growth forecast for the following year to 1.3% due to global trade pressures affecting various economies. Canada and France also experienced reductions in their growth projections, while the US saw a slight increase in its forecast.
The IMF’s latest report upgraded global growth for this year to 3.2%, reflecting the resilience of many economies in the face of tariff pressures. Chancellor Rachel Reeves emphasized the UK’s economic performance and income growth, expressing a commitment to addressing economic challenges for all citizens.
Russ Mould, investment director at broker AJ Bell, highlighted the UK’s inflationary concerns, which could limit the Bank of England’s ability to adjust interest rates. The current inflation levels may necessitate maintaining interest rates to support consumers and businesses, especially amidst a fragile job market, placing the Bank of England in a difficult position when considering rate adjustments.