The International Monetary Fund (IMF) has warned that UK households could see food and energy costs rise again after the latest price jump amid the cost of living crisis. The rise is sharper than previously forecast as a result of the conflict in the Middle East making food and energy costs higher around the world.
Fresh forecasts also note that Prime Minister Andy Burnham is now expected to see UK economic growth slow down next year. The IMF said that prices are set to keep increasing into next year across the world.
IMF warns of elevated and volatile prices
The IMF noted that a prolonged stalemate or further escalation in the Middle East could 'keep energy and food prices elevated and volatile', weigh on economic growth and worsen the fiscal position of the government. The body stated that extreme weather, cyber attacks and attacks on energy infrastructure could further amplify things.
According to the latest world economic outlook, consumer prices are set to have increased by 3.3 per cent in 2026, up from a previous prediction of 3.2 per cent. With this figure potentially marking the joint second-highest rate among the G7 group of countries, inflation is expected to slow to 2.8 per cent for next year. However, this is significantly higher than the 2.4 per cent rate previously forecast by the IMF.
UK inflation and growth forecasts
Most recent figures from the Office for National Statistics (ONS) revealed that inflation increased to 3.1 per cent in August. It is expected to increase further over the coming months, amid pressure from higher household energy bills. The Bank of England expects UK inflation to lift to 'slightly above 4 per cent' in the first quarter of 2027. This is linked to another increase in the household energy price cap in January, but inflation is then expected to swing back lower throughout the year.
Core UK inflation is expected to fall back to target levels by the end of this year, later than the IMF previously forecast. Global inflation is forecast to rise to 4.7 per cent in 2026 and then slow to 4.1 per cent in 2027. This would be 0.2 percentage points higher than its previous predictions.
Released alongside annual meetings from the IMF and World Bank in Bangkok, the report also pointed to stronger-than-expected UK growth for this year. UK gross domestic product (GDP) is set to grow 1.3 per cent this year, having previously predicted a 1 per cent rise. In another blow, growth for next year is set to slow to 1.2 per cent, down from a previous forecast of 1.3 per cent.
Unemployment and official responses
The rise of AI technology has helped to boost many economies globally this year. In spite of this, the IMF noted that further disruption linked to the Middle East conflict and accelerating prices are likely to weigh on growth. Meanwhile, the report indicated that UK unemployment is set to strike 5.3 per cent this year, down from a prediction of 5.6 per cent.
Economic counsellor Silvana Tenreyro pointed to the country's efforts at fiscal consolidation when asked what advice the IMF had for the UK. "The message for the UK is just simply stay the course and continue on that trajectory," she said.
Chancellor of the Exchequer John Healey added: "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 stated: "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."
