The International Monetary Fund (IMF) has projected that UK inflation will ease back to target levels faster than previously expected, as the global economic shock from the Middle East conflict proves "better than feared".
Inflation Forecasts Revised Downward
In its latest update to the World Economic Outlook, the IMF indicated that UK inflation will drop to the Government and Bank of England's target rate of 2% by mid-2027. This is a significant revision from May, when the organisation had forecast that inflation would not reach the target until the end of next year.
UK consumer price index (CPI) inflation was most recently recorded at 2.8% in May, though it is widely expected to increase in the coming months. The Bank of England has predicted that inflation could pick up to slightly above 3.25% later this year.
Factors Behind the Revision
Inflation projections in the UK have been tempered by a recent interim peace deal between the US and Iran, which has contributed to easing oil prices. However, the IMF noted that its global price inflation forecasts for both 2026 and 2027 remain slightly higher than its April outlook report.
Global price inflation is set to rise to 4.7% this year from 4.1% last year, driven by higher food and energy prices. The IMF predicted this will cool to 3.9% next year, but the forecasts for 2026 and 2027 are still 0.3 and 0.2 percentage points higher, respectively, compared with earlier projections.
Global Economic Growth Outlook
The global economy is expected to grow by 3% this year, down slightly from a previous forecast of 3.1%. However, growth is expected to improve to 3.4% in 2027, up from a previous forecast of 3.2%. The IMF maintained its predictions for UK economic growth made in May, with the UK economy set to grow by 1% in 2026—0.2 percentage points stronger than the April outlook but unchanged from the May update.
In its report, the IMF stated: "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."
Chancellor's Response
Chancellor Rachel Reeves welcomed the IMF's assessment, saying: "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."
