The International Monetary Fund (IMF) has warned that UK households are set to face a sharper rise in inflation than previously forecast, as the conflict in the Middle East drives food and energy costs higher. The global economics body also expects UK economic growth to slow down next year, according to fresh forecasts.
Inflation forecasts revised upward
The latest world economic outlook showed that UK consumers are set to witness faster-than-expected inflation for this year and 2027. Consumer prices are set to have increased by 3.3% in 2026, up from a previous prediction of 3.2%. This would mark the joint second-highest rate among the G7 group of countries.
Meanwhile, inflation is expected to slow to 2.8% for next year, but this is significantly higher than the 2.4% rate previously forecast by the IMF. Most recent figures from the Office for National Statistics (ONS) showed that inflation increased to 3.1% in August and is expected to tick higher over the coming months, amid pressure from higher household energy bills.
Energy price cap impact
The Bank of England has said it expects UK inflation to lift to "slightly above 4%" in the first quarter of 2027, partly linked to another increase in the household energy price cap in January. However, inflation is then expected to swing back lower throughout the year.
The IMF said it expects core UK inflation to fall back to target levels by the end of this year, later than it had previously forecast. Globally, inflation is expected to lift to 4.7% in 2026 and then slow to 4.1% in 2027, although this would be 0.2 percentage points higher than its previous predictions.
Growth outlook and UK response
The report, which was released alongside annual meetings from the IMF and World Bank in Bangkok, also pointed to stronger-than-expected UK growth for this year. UK gross domestic product (GDP) is set to grow 1.3% this year, having previously predicted a 1% rise. However, growth for next year is set to slow to 1.2%, down from a previous forecast of 1.3%.
An upwards boost from the adoption of AI technology has helped to boost many economies globally this year. However, the IMF indicated that accelerating prices and further disruption linked to the Middle East conflict are likely to weigh on growth. The latest report also indicated that the shock to the labour market has been shallower than expected, with UK unemployment set to strike 5.3% this year, down from a prediction of 5.6%.
Asked what advice the IMF had for the UK, economic counsellor Silvana Tenreyro pointed to the country's efforts at fiscal consolidation. "The message for the UK is just simply stay the course and continue on that trajectory," she told the media.
Chancellor of the Exchequer John Healey said: "Conflict in the Middle East and Europe is hitting people in the UK and around the world. But Britain's economy is showing strong international resilience in the face of these challenges: we're forecast to be the joint second fastest-growing G7 nation in 2026 and have the lowest deficit in the G7 by 2031. This week I will meet international finance ministers in Bangkok to discuss how we limit the impact of the conflicts on people and businesses, while maintaining strong fiscal discipline. We are determined to drive good growth in every postcode, provide some breathing space for today, and fresh hope for the future."
Shadow chancellor Andrew Griffith said: "John Healey must tackle both problems in the Budget by getting Britain drilling and dealing with out of control welfare spending. If the Chancellor reaches for more tax rises instead, he is choosing slower growth and working people will pay for it."
