A sobering new forecast predicts the United Kingdom will experience the highest inflation rate among G7 nations in both 2025 and 2026, even as its short-term growth prospects have slightly improved. The country’s inflation is expected to average 3.4% next year, a figure that has prompted a direct call for the Bank of England to be “very cautious” about cutting interest rates.
The report, issued by a major global financial institution, cites strong wage growth and rising inflation expectations among the British public as key drivers of this persistent price pressure. The chief economist noted that households and firms are becoming “less certain that inflation is coming down quickly,” a psychological factor that can make inflation harder to control.
This domestic inflation battle is unfolding against a complex global backdrop. The world economy has shown “unexpected resilience” to trade shocks, leading to an upgraded global growth forecast of 3.2% for this year. However, this is viewed as a temporary state, with the full negative impact of US tariffs on business investment still to come.
The report also identifies several other major risks to the global outlook. A US crackdown on immigration is singled out as a potential drag on its own economy, while “stretched valuations” in global stock markets, particularly in the AI sector, pose a threat of a sharp market correction that could stifle investment worldwide.
Despite concerns about rising UK government bond yields, the report’s author suggested these were largely driven by global factors and did not pose a “major risk” at present. The primary focus remains squarely on the inflation fight and the need for monetary policy to remain tight until price pressures have definitively cooled.