Inflation forecast: where are prices heading next?

After peaking at 11.1% in October 2022, the rate of UK inflation has been slowing and household budgets are under less pressure than they once were.

In September this year, the Consumer Prices Index (CPI) fell below the Bank of England’s 2% target for the first time in over three years – a landmark moment. But it was short-lived, with inflation inching back up to 2.3% a month later, driven by higher energy prices.

The next inflation reading (covering November) will be released on Wednesday, 18 December. It is expected to rise again, this time to 2.6%, according to Susannah Streeter, head of money and markets at Hargreaves Lansdown.

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“Higher tobacco duties and energy bills will be taking a toll,” she says. “Our desire for travel has been sending airfares soaring, and with grocery price inflation also heading upwards again, policymakers are once again having to deal with a hotter mess of prices.”

Despite this, households shouldn’t become despondent – inflation was always expected to pick up slightly towards the end of the year. In fact, the picture today looks better than some experts had previously expected.

Governor of the Bank of England Andrew Bailey recently told the Financial Times that consumer price inflation has fallen more quickly than policymakers envisaged a year ago, adding that the Monetary Policy Committee (MPC) could potentially cut the base rate four times in 2025.

Against this backdrop, we take a closer look at the latest developments before delving into the inflation outlook. Where are prices heading over the next few years? Have recent measures announced in the Autumn Budget thrown a spanner in the works? Plus, could the tariffs threatened by president-elect Donald Trump reignite inflation on a global scale?

Will the rate of inflation fall over the next five years?

The Office for Budget Responsibility (OBR) published an updated economic and fiscal outlook in October to accompany Rachel Reeves’s Autumn Budget. This included inflation forecasts for the next five years.

Inflation (as measured by the Consumer Prices Index) is expected to average 2.5% this year and 2.6% in 2025. It should then fall to 2.3% in 2026, 2.1% in 2027, 2.1% in 2028 and 2% in 2029.

The OBR adjusted its inflation expectations upwards in its latest update. It expects the policies announced in the Budget to push inflation up by 0.4 percentage points, once they hit peak effect.

It comes after chancellor Rachel Reeves unveiled £70 billion in spending policies and £40 billion in tax hikes, with the majority of this being funded by an increase in employer National Insurance (NI) contributions. There are fears that businesses could pass these costs on to consumers, putting prices up in an attempt to protect their margins.

Streeter offers a slightly more nuanced view, though. She says it is also possible that higher NI contributions will show up in lower wage growth. Neither route is great news for working households, but the second option would be preferable for the Bank of England when it comes to keeping inflation under control.

The Budget isn’t the only political development impacting the inflation outlook. Further afield, events in the US and the Middle East could also pose a risk.

Analysis conducted by the National Institute of Economic and Social Research (NIESR) before the US election suggests UK inflation could be 3-4 points higher over the next two years, if Trump imposes the tariffs that have been threatened. Meanwhile, an escalation in the violence in the Middle East has the potential to cause an oil price shock.

In terms of interest rates, the Bank of England will probably tread a cautious path ahead. The next MPC meeting will take place on 19 December. Financial markets are forecasting an 88% probability of the base rate staying on hold at 4.75% next week.