Renewed hostilities in the Middle East have dashed hopes for a rapid decline in UK inflation, with the International Monetary Fund warning that the fragile ceasefire between the US and Iran appears to be over. President Donald Trump's branding of Iran as 'scum' has fuelled fears that the recent fall in living costs may be short-lived.
IMF Revises Inflation Forecasts Amid Middle East Uncertainty
The Washington-based IMF had predicted UK inflation would return to the Bank of England's 2% target by mid-2027, a significant improvement from its May forecast of end-2027. The optimism was based on signs of an end to the Middle East conflict after a ceasefire deal between the US and Iran. However, even as the IMF published its update, there were concerns of a return to full-scale war.
US President Donald Trump declared the ceasefire 'over' after both countries exchanged air strikes. 'I don't want to deal with them anymore, they're scum,' the president said at a Nato summit in Turkey. 'They're sick people, they're led by sick people... As far as I'm concerned, it's over.'
Oil Prices Surge, Threatening Pump Price Falls
The hopes of lower inflation had been partly due to a sharp fall in oil prices in recent weeks. However, the price of Brent crude oil jumped 5% to over $78 a barrel in the wake of renewed tensions. Millions of UK drivers had benefited from lower pump prices since the ceasefire was announced, but the AA warned the decline is likely to stall.
'This is news UK drivers didn't want to hear ahead of the summer getaway later in the month. The ending of the ceasefire is ominous for UK pump prices but not all is lost,' says Luke Bosdet, the AA’s spokesman on pump prices. 'For starters, a feature of the US-Iran war has been highly volatile oil prices that have fed through to the pump. However, the sharp fall in petrol and diesel prices has by and large tracked the more recent fall in wholesale costs and come through to the pump far more quickly than would have been expected previously.'
IMF Warns of Global Economic Toll
Petya Koeva Brooks, deputy director of the IMF's research department, said: 'We are faced with a lot of uncertainty at the moment.' She also warned a renewed phase of the conflict 'would take a toll on the global economy.' The IMF’s latest update to its World Economic Outlook said its global price inflation forecasts for both 2026 and 2027 were still slightly higher than its outlook report in April.
Global price inflation is set to rise to 4.7% this year from 4.1% last year on the back of higher food and energy prices, but is predicted to cool to 3.9% next year. Meanwhile, the global economy is expected to grow by 3% this year, down slightly from a previous forecast of 3.1%, but improving to 3.4% in 2027, up from a previous forecast of 3.2%.
UK Growth Forecasts Maintained
The IMF maintained the predictions for UK economic growth it made in May. The UK economy is set to grow by 1% in 2026, 0.2 percentage points stronger than the IMF’s previous outlook report in April, but the same as the UK-focused update published in May. Chancellor Rachel Reeves said: 'The UK is the only G7 country where the growth forecast this year has been upgraded by the IMF. This shows we have the right economic plan to build a stronger and more secure economy. Our choices mean the economy is in a better position to deal with the costs of the war in Iran while kickstarting long-term growth by focusing on our three big choices - boosting AI, regional growth and strengthening trade with the EU.'
The IMF report noted: 'The global economy as a whole has, so far, weathered the shock from the war better than feared. Risks to the outlook are more balanced than in April but still tilted to the downside. The possibility of renewed Middle East conflict looms large and could extend commodity price volatility, further threaten supply chains, raise prices, and weigh on financial conditions.'
