The International Monetary Fund has warned that UK consumers will experience the highest inflation among G7 nations in 2025 and 2026. In its latest World Economic Outlook, the IMF revised its UK inflation forecast upwards to 3.4% for this year and 2.5% for next year, citing persistent price pressures.
The IMF noted that 'sticky' inflation has contributed to rising yields on UK government bonds. Athanasios Vamvakidis, the IMF's deputy director for monetary and capital markets, stated that markets are concerned about the UK economy, with higher volatility compared to other advanced economies. He added that investors are seeking more details on the UK's fiscal plans.
Chancellor Rachel Reeves is expected to announce tax rises and spending cuts in the upcoming budget to build a financial buffer against fiscal rules. The IMF modestly upgraded its UK growth forecast for this year to 1.3%, but downgraded next year's to the same level, amid labour market concerns.
IMF chief economist Pierre-Olivier Gourinchas described many drivers of UK inflation as 'temporary factors', such as water bills and rail price rises. However, he warned of risks from higher wage growth and uncertainty about inflation expectations, advising the Bank of England to proceed cautiously with interest rate cuts.
The IMF also warned of a potential 'sharp correction' in US stock markets, which it described as complacent about risks. Globally, the IMF upgraded its 2025 growth forecast to 3.2%, but cautioned that the full impact of US tariffs is yet to be felt, leaving the outlook 'dim'.
