UK inflation to rise to highest in G7, warns IMF

The UK is on course to experience the highest inflation rate among G7 nations in both 2025 and 2026, the International Monetary Fund (IMF) has warned, as it revised up its forecasts for UK price growth in its latest World Economic Outlook.

In its report, released this Tuesday to coincide with the annual meetings of leading politicians and central bank bosses in Washington DC, the IMF said inflation in the UK would rise “more sharply than expected” in both years, compared with projections published just three months ago.

The revised forecasts suggest UK households are likely to face persistently higher prices, even as central banks move to bring inflation under control.

According to the report, the IMF now expects UK inflation to average 3.4% in 2025, a revision upward from its previous forecast of 3.2%. Inflation is then projected to slow to 2.5% in 2026, but this is higher than the 2.3% figure anticipated earlier this year.

It means UK households are therefore expected to face the highest rate of price inflation across all the G7 group of advanced economies over the two years.

Read more: Barratt Redrow and Persimmon launch 5% mortgage deposit scheme

The UK Consumer Price Index rose 3.8% in both July and August, the highest levels recorded since January 2024, according to the Office for National Statistics (ONS).

The increase has been most notable in food and hospitality sectors, where firms and industry bodies say cost rises have been fuelled by higher labour and tax burdens.

The IMF’s updated projections show the challenge for the Bank of England (BoE), which has a 2% inflation rate target mandate. With the UK set to outpace its G7 peers on inflation, the path to monetary easing may prove more protracted than initially hoped.

Russ Mould, investment director at AJ Bell, said: "Central banks raise rates when they’re trying to combat high inflation, and they cut them when inflation looks like it is under control. An inflation figure starting with ‘3’ is arguably outside of the Bank of England’s comfort zone, so it might be forced to keep interest rates steady. Normally that wouldn’t be such a problem if it wasn’t for a fragile jobs market.

“Central banks look at both inflation and labour when making interest rate decisions, and a weak jobs market might traditionally call for rate cuts. It suggests the Bank of England is stuck between a rock and a hard place.”

The UK jobs market continues to show signs of weakness, with pay growth slowing and unemployment edging higher ahead of the autumn budget next month.

The latest data from the ONS, released on Tuesday, showed that annual wage growth excluding bonuses in the three months to August was 4.7%, down slightly from 4.8% between May and July.

Story Continues

Despite the inflationary outlook, the IMF upgraded its forecast for UK GDP growth in 2024 to 1.3%, up from 1.2%, citing stronger-than-expected economic performance in the first half of the year. However, it trimmed its 2025 growth forecast from 1.4% to 1.3%, indicating a weakening in global trade momentum.

Other advanced economies also saw revised forecasts. Canada and France had their growth projections lowered due to “pressure from tariff headwinds”, while the US saw a modest upward revision.

The global economy is expected to grow by 3.2% in 2025, up from the IMF’s previous estimate of 3%. The report attributed this to stronger-than-anticipated activity earlier in the year, as businesses and consumers rushed to make purchases ahead of trade barriers.

The IMF said growth early in the year surpassed expectations as spending was brought forward, while many economies have also benefited from smaller increases in US tariffs than originally announced.

“Households and businesses front-loaded their consumption and investment in anticipation of higher tariffs,” the report said.

“This gave a temporary boost to global activity in early 2025.”

Read more: Oil prices fall as US-China trade tensions flare up

Responding to the IMF’s assessment, chancellor Rachel Reeves said: “This is the second consecutive upgrade to this year’s growth forecast from the IMF. But know this is just the start. For too many people, our economy feels stuck. Working people feel it every day, experts talk about it, and I am going to deal with it.”

Meanwhile, BoE governor Andrew Bailey, who is in Washington DC for the IMF meetings, warned that a stock market bubble could be about to burst as fears grow over the inflated value of AI tech companies.

Bailey wrote Monday to counterparts across the G20 to warn about the risk of a market crash amid rising asset prices and weak global economic growth.

Speaking in his capacity as chairman of the Financial Stability Board, Bailey said: “While most jurisdictions have seen a rebound in financial markets in recent months, the resulting asset valuations could now be at odds with the uncertain economic and geopolitical outlook, leaving markets susceptible to a disorderly adjustment.”

“Risks and uncertainty remain elevated, driven by persistent geopolitical tensions and fragmentation in trade and financial markets,” he added.

“Sovereign debt levels have continued to increase and are forecast to rise further. Vulnerabilities in the financial system remain high.”

Bailey warned that regulators and central banks “cannot lose sight of emerging risks”, promising to beef up “surveillance capabilities” in financial markets.

“Whether it is the rise of private finance, the implications of geopolitical tensions, or the increasing role of stablecoins for payment and settlement purposes, our ability to detect and address emerging risks is critical,” he wrote.

Download the Yahoo Finance app, available for Apple andAndroid.

View Comments