UK inflation forecast: where are prices heading next?
UK inflation fell sharply in November. Will this drop be sustained, or should consumers brace for higher inflation readings in 2026?
Inflation is set to fall further throughout 2026, in welcome news for both consumers and chancellor Rachel Reeves.
The disinflationary policies announced in the Autumn Budget are expected to push price growth down by around half a percentage point, according to analysis by the Bank of England.
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The minutes said: “This Budget news, in combination with other news in recent CPI data and with some downward moves in sterling oil and gas futures curves since November, had led Bank staff to lower their expectation for CPI inflation to closer to 2% in 2026 Q2.”
What is UK inflation now?
Inflation fell to 3.2% in November, falling for the second consecutive month after reaching a recent peak of 3.8% in July, August, and September.
November’s fall was also sharper than most analysts had predicted. The Bank of England had expected inflation to fall to 3.4%, down from October’s reading of 3.6%.
Lower food, alcohol and tobacco inflation seem to have driven the drop, while lower price growth for clothing, restaurants, and furniture also helped. This was partially offset by an increase in communications inflation.
Grant Fitzner, chief economist at the ONS, said: “Lower food prices, which traditionally rise at this time of the year, were the main driver of the fall with decreases seen, particularly for cakes, biscuits, and breakfast cereals.
“Tobacco prices also helped pull the rate down, with prices easing slightly this month after a large rise a year ago. The fall in the price of women’s clothing was another downward driver.”
When will inflation come down?
The better-than-expected inflation reading for November led some commentators to speculate that we are now coming towards the end of this recent inflationary cycle.
Charlotte Kennedy, chartered financial planner at wealth management firm Rathbones, said the latest figures “suggest the economy is entering the final stretch towards more normal levels [of inflation],” partially thanks to measures announced in the Budget.
Meanwhile, the Office for Budget Responsibility, the UK’s fiscal watchdog, forecast in November that inflation will fall to around 2.1% in Q4 2026 when assessing the economic impacts of policies announced in the Budget.
This view is supported by most economists surveyed by the Treasury, who overwhelmingly expect inflation to be lower by the end of 2026 than it was in the fourth quarter of 2025, all things remaining equal.
When asked in December, the average inflation forecast among them was 3.5% in Q4 2025, falling to an average of 2.2% in Q4 2026.
While forecasts differ among economists, almost all seem to agree that at the very least inflation has peaked and will be on a downward trajectory through 2026.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “We expect disinflation to continue at pace. Why? Negative base effects will kick in over 2026. And government policy measures should reinforce the drop in energy and services prices.
“Weaker pricing power will also help – and potentially accentuate the 2026 price drop. We update our projections accounting for the recent fall in energy prices, including government policy and our most recent webscrapes.”
What’s the link between inflation and interest rates?
Inflation above the 2% target is always a cause for concern for economists, policymakers and consumers.
The Bank of England is particularly concerned about inflation, as it has a remit to guide and control inflation so prices do not spiral out of control.
This is largely done through influencing interest rates, which are typically raised to fight inflation.
Broadly speaking, the trade-off to fighting inflation with higher interest rates is reduced economic activity. When interest rates are high, people have to use more of their earnings on expenses like their mortgage and are incentivised to save their cash as savings rates tend to be higher.
However, despite inflation being forecast to remain above target this year, the Bank of England has been gradually cutting rates since the summer of 2024.
What does falling inflation mean for future interest rate cuts?
The Bank of England chose to cut interest rates to 3.75% at the most recent Monetary Policy Committee meeting on 18 December.
The 25 basis point cut brought the bank rate to the lowest it has been since February 2023.
The vote to cut was narrowly passed by five to four, with governor Andrew Bailey having the deciding vote to cut despite a large faction in the MPC wanting to hold rates at 4%.
In the previous meeting in November, the MPC held rates at 4%, also passing by 5-4.
The reason the December cut was able to be passed was largely due to Andrew Bailey’s belief that disinflation is now “more established” in the economy.
He said: “CPI inflation has fallen from its recent peak and upside risks have eased. Measures in the Budget should reduce inflation further in the near term. The key question for me now is the extent to which inflation settles at the 2% target in an enduring way.”
However, Bailey noted that while he “sees some scope for some additional policy easing,” the path for future rate cuts is not pre-determined.
Moreover, there is an increasing sense among economists that the base rate is coming closer to the neutral level of interest in the economy, potentially meaning that decisions to cut, hold, or raise could become more limited.
Raja at Deutsche Bank said: “As we inch our way towards a more 'neutral' policy setting, we think policy divisions will narrow over 2026.
“Bank Rate is inching its way towards a more 'neutral' policy setting. And the scope for more rate cuts is limited, with the Bank sending its more explicit message yet on the path for policy: ‘judgements around further policy easing will become a closer call’.”
This being said, the house view at Deutsche Bank is still that they expect falling inflation and a deteriorating labour market to “keep quarterly rate cuts in play next year”.
The bank forecasts two rate cuts in 2026 – one in March and one in June – to bring the base rate to 3.25%.
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