International Monetary Fund upgrades inflation forecasts for 2025 and 2026 whilst revising growth predictions as rising wage bills and poor harvests drive price pressures
The United Kingdom will experience the highest inflation among G7 industrialised nations both this year and next, according to the International Monetary Fund’s latest economic outlook.
Price rises in Britain are expected to outpace all other major advanced economies in 2025 and 2026, the world’s lender of last resort warned on Tuesday. The stark assessment comes as UK households face mounting cost-of-living pressures from surging food prices and rising service costs.
The IMF’s World Economic Outlook, released as leading politicians and central bank officials gather in Washington DC, represents an unexpected deterioration from the fund’s July forecast. The organisation now predicts UK inflation will average 3.4% in 2025, up from its previously estimated 3.2%.
Inflation Forecast Revised Upwards
For 2026, the IMF expects inflation to slow to 2.5%, though this remains higher than the 2.3% predicted just three months ago. The revised figures place Britain’s inflation rate above all other G7 members over the two-year period.
The forecast highlights a significant challenge for the Bank of England as it seeks to bring inflation back to the 2% target rate. Most recent figures from the Office for National Statistics showed UK consumer price index inflation struck 3.8% in both July and August, marking the highest levels since January 2024.
The Bank of England has forecast inflation will reach 4% by the end of the year, double the official target. Governor Andrew Bailey explained in a letter to the Chancellor in September that inflation remained well above target mostly due to increases in food prices and administered prices such as water bills and vehicle excise duty.
Food and Services Driving Price Pressures
Food and non-alcoholic drink price inflation has been particularly acute, rising to 5.1% in August 2025, the highest rate since January 2024. This compares with 3.3% in January 2025, representing a sharp acceleration over recent months.
Some food categories have experienced even steeper increases. Beef and veal prices in August were up 24.9% compared with the previous year. Butter prices rose 18.9%, whilst chocolate increased by 15.4%.
The surge in food inflation has been driven by multiple factors. Global agricultural commodity prices have increased this year, with a UN Food and Agriculture Organization index showing world food prices up approximately 8% in August 2025 compared with August 2024.
The Bank of England has noted that UK food price inflation has exceeded eurozone food price inflation, suggesting a UK-specific factor is also contributing to higher prices. Poor harvests and rising domestic costs have compounded the pressure on food retailers.
Services inflation also remains elevated at 4.7% in August 2025, down from 5% in July. The Bank of England pays close attention to services prices when setting interest rates, as they are considered less exposed to global factors and more dependent on domestic costs.
Wage Costs Adding to Pressures
Rising wage bills have contributed significantly to persistent inflation. The increase in employer National Insurance contributions and the rise in the National Living Wage, both coming into effect in April 2025, have kept labour cost growth higher than it otherwise would have been.
A Decision Maker Panel survey of businesses found that as a result of the employer NICs increase, 66% of firms reported lowering their profit margins, with 34% raising prices and 20% paying lower wages than otherwise.
Chancellor Rachel Reeves raised employer National Insurance contributions by a substantial £25bn in her October 2024 Budget. Many firms have indicated they would raise prices following the increase in their social security contributions.
Mixed News on Growth Forecasts
There was mixed news elsewhere in the IMF’s outlook. The UK’s economic growth forecast, as measured by GDP, was revised upwards for this year but revised downwards for next.
The IMF now expects the UK economy to grow by 1.3% in 2025, after being boosted by strong growth in the first half of the year. This represents an improvement against the previous IMF forecast of 1.2%, published in July.
However, the fund has cut its growth prediction for 2026 from 1.4% to 1.3% as global trade pressures threaten to impact many economies. The downgrade reflects concerns over the labour market and broader international economic headwinds.
The IMF said growth early in the year surpassed expectations as spending was brought forward. Households and businesses front-loaded their consumption and investment in anticipation of higher tariffs, the report stated. This gave a temporary boost to global activity in early 2025.
Many economies have also benefited from smaller increases in US tariffs than originally announced, though uncertainty over trade policy remains elevated.
Political Response Divided
Chancellor Rachel Reeves welcomed the growth upgrade, describing it as the second consecutive improvement to this year’s growth forecast from the IMF. She acknowledged that for too many people, the economy feels stuck.
Ms Reeves stated working people feel it every day and experts discuss it, adding she is determined to deal with the challenge. However, she emphasised this is just the start of economic improvements.
Shadow Chancellor Sir Mel Stride said the IMF assessment made for grim reading. He claimed that since taking office, Labour have allowed the cost of living to rise, debt to balloon, and business confidence to collapse to record lows.
Conservative leader Kemi Badenoch called the report a damning verdict on Labour’s management. The opposition has seized on the inflation forecasts as evidence of economic mismanagement.
G7 Comparison Reveals UK Struggles
Among G7 nations, the UK’s inflation performance stands out negatively. The OECD recently predicted UK inflation would average 3.5% across 2025, compared to 2.7% in the United States, 2.2% in Germany and 2% in Canada.
Only Japan, with an expected 3.1% inflation rate, comes close to Britain’s forecast level among major advanced economies. The disparity highlights the specific challenges facing the UK economy.
The eurozone and US are experiencing faster disinflation, with inflation falling more rapidly than in Britain. This divergence raises questions about UK-specific factors contributing to persistent price pressures.
Bank of England Faces Difficult Balancing Act
The inflation outlook complicates the Bank of England’s monetary policy decisions. The Monetary Policy Committee has maintained the base interest rate at 4% but faces difficult trade-offs between supporting growth and controlling inflation.
Most economists expect the Bank to hold rates steady at its upcoming meetings as upside inflation risks remain elevated. The central bank’s 5-4 split vote for a quarter-point cut at its previous meeting suggested it might slow an already gradual pace of rate reductions.
The Bank has forecast that British inflation will remain above its 2% target until spring 2027, underscoring the persistent nature of price pressures. This extended period of above-target inflation tests the central bank’s credibility and policy framework.
Core inflation, which excludes volatile energy, food and tobacco prices, fell to 3.6% in August from 3.8% in July. However, this measure remains well above the 2% target.
Household Impact Mounting
The cumulative effect of inflation on household finances has been substantial. Comparing the price level in August 2025 with five years earlier in August 2020, UK consumer prices rose by 28.2%. For context, in the previous five-year period from August 2015 to August 2020, prices rose by a total of just 8.3%.
Research organisations have warned that headline inflation remaining uncomfortably high means households continue feeling the impact of elevated food prices. The Resolution Foundation called on the Chancellor to ease cost-of-living pressures on struggling families in the November Budget.
British inflation is now higher than in the US, where it increased to 2.9% in August, and significantly above the eurozone, where it stands at 2%, matching the European Central Bank’s target.
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