The International Monetary Fund (IMF) has projected that UK inflation will ease back to the target rate of 2% faster than previously expected, offering a significant boost to Chancellor Rachel Reeves. The rate of price increases is now anticipated to reach the Government and Bank of England's target by mid-2027, according to the IMF's latest report.
Current Inflation and Forecasts
UK consumer price index (CPI) inflation stood at 2.8% in May, though it is widely expected to rise in the coming months. The Bank of England has predicted that inflation could temporarily climb to slightly above 3.25% later this year before declining. The IMF's assessment suggests a quicker return to stability than earlier forecasts indicated.
The IMF stated: "The global economy as a whole has, so far, weathered the shock from the [Iran] war better than feared. Risks to the outlook are more balanced than in April but still tilted to the downside." It also warned: "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."
Growth Outlook and Political Reactions
The UK economy is projected to grow by 1% in 2026, according to the IMF. This is 0.2 percentage points higher than the IMF's April outlook but consistent with the UK-focused update published in May. Chancellor Rachel Reeves highlighted that the UK is the only G7 country where the growth forecast for this year has been upgraded by the IMF.
Reeves said: "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."
However, Shadow Chancellor Sir Mel Stride offered a contrasting view: "The IMF's forecast shows growth slowing - yet another reminder that this Labour government is out of its depth. With more taxes and borrowing on the horizon under Burnham, Labour look set to double down on all of the mistakes they have already made. Unemployment is continuing to rise, as is the cost of living for families."
