UK inflation forecast: where are prices heading next?
Experts have revised their inflation expectations for 2026 due to the Middle East conflict. What’s next for prices?
Sam Walker
UK inflation looks to be on the rise after conflict in the Middle East scuppered hopes of a return to the 2% target in 2026.
Although inflation dipped to 2.8% in the year to April 2026, according to the latest data from the Office for National Statistics (ONS), forecasters have warned that price growth will likely quickly bounce back in the following months as the economy deals with the repercussions of the Iran war.
April’s data was in large part lower because April 2025’s inflation figures were unusually high as a tranche of household bills increased that month.
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It means that the comparison between the two years looks far less dramatic than for other months, but is unlikely to hold for long.
April’s dip was also fuelled by a fall in the price of energy, as households across the UK started to benefit from a cut to the Ofgem energy price cap.
But the price cap will not stay this low for long – energy prices are expected to soar in the summer and beyond when the new price cap, which takes the recent surges in the wholesale prices into account, comes in.
That will likely lead to a surge in inflation from July onwards.
Where has inflation gone recently?
The CPI measure of inflation was 3% in January 2025, before hitting a recent peak of 3.8% in July and slowing back to 3% in the first two months of 2026.
January and February’s data seemed to support the case economists were making that inflation would fall through 2026 and reach the Bank of England’s 2% target (which is set by the government) this year.
However, as the economic impact of the Iran war has become clearer – inflation accelerated to 3.3% in March – experts have changed their predictions.
Where could inflation go next?
Inflation is likely to rise in the following months, because the war in Iran is continuing to ravage global trade.
In particular, the war has led to the Strait of Hormuz, a narrow waterway between Iran and Oman through which around 20% of the world’s oil and gas is transported, to be shut.
That has led to a surge in the price of oil, impacting motor fuel and heating oil prices.
But as oil is used in the production of a significant portion of the things we use and buy every day, price shocks will likely affect more than just those examples.
Goods as varied as plastic, crayons, shoes, backpacks, iPhones, pillows, and much more are produced with oil, and any increase in the price of oil will be reflected in the price of those goods.
Meanwhile, the energy market is also under pressure because of the war.
Energy bills for households and businesses are widely forecast to increase from July onwards when the next Ofgem energy price cap comes in.
The new cap will reflect the increased wholesale price of energy because of the war, meaning a hike in prices.
Energy consultancy Cornwall Insight’s latest forecasts suggest the Ofgem price cap will rise by 13% to £1,850 per year (an annual rise of £209) from July.
To put that in context, its prediction for the July price cap before the outbreak of tensions in Iran was £1,645 per year, more than £200 lower.
The UK is particularly sensitive to the wholesale energy market because it is a net importer of energy from overseas, meaning it is left at the whim of the market to set prices.
Moreover, even firms that do not produce goods derived from oil and gas markets will likely need to hike prices as the costs associated with running the business (energy bills, transportation costs, etc.) are still exposed to those markets. These costs will likely be passed on to the consumer.
These factors have led many economists to alter their predictions for inflation for the rest of 2026.
Where do experts think inflation will go?
Unfortunately for Brits, most economists are united in thinking that inflation will rise for the rest of 2026.
Sanjay Raja, chief UK economist at Deutsche Bank, said April's slump is likely to be fleeting thanks to the external price pressures from the Iran war.
He said: “Given the prolonged closure of the Strait of Hormuz, energy prices remain elevated. Oil prices will likely rise a little further in the coming months. And gas/electricity prices will catch up to market pricing as soon as July – when the next Ofgem price cap kicks in.”
Raja also notes that as these price increases affect all parts of the supply chain, we are likely to see indirect price rises for other goods.
“Higher commodity prices will likely see food prices rise further. And core goods prices will also – at some stage – be less insulated from ongoing price rises. To be sure, despite [April’s] encouraging CPI print, there’s still a lot of upward pressure yet to come across to headline inflation.”
The prediction that inflation will continue to rise is shared by economists at the Bank of England, who have mapped out three scenarios of varying severity.
All the scenarios are based on the Bank moving interest rates in line with current market expectations, that is to say a rise.
In their first scenario, the Bank expects oil and gas prices to follow the paths currently implied by the market, anticipating households to spend less and save more. In this scenario they expect no second-round inflationary effects as price growth peaks at 3.6% this year.
Their second scenario is not much different, only adjusting the length that energy prices will be elevated. Second-round effects are assumed to be modest, pushing up their prediction to 3.7%.
The Bank’s worst-case scenario is much more dramatic. It anticipates a sharp rise in energy prices that keeps them high for a prolonged period, leading to much stronger second-round effects than the ones modelled in scenario B.
If this scenario turns out to be correct, then the Bank’s model shows inflation could peak at 6.2% at the start of 2027.
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 focused on inflation, as it has a remit to ensure prices do not spiral out of control.
This is largely done through setting interest rates, which are typically raised to fight inflation.
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.
What does the inflation outlook mean for future interest rate cuts?
The Bank of England chose to hold interest rates at 3.75% at the most recent MPC meeting on 30 April, with the motion passing by a majority of 8 for to 1 against.
The committee’s chief economist and executive director, Huw Pill, was the one person who voted to raise rates, to 4%.
Before the most recent conflict in the Middle East, analysts expected the MPC to cut interest rates twice in 2026, with a 90% chance of a cut at the next MPC meeting on 19 March having been priced in by the markets.
However, the chances of this dropped dramatically as the inflationary risk of the US-Iran war became clearer. Most economists no longer expect any more rate cuts in 2026, with the market even pricing in rate hikes.
April’s surprisingly low inflation figures are unlikely to change the view of the Bank as most predictions see this month’s data as a blip and expect price growth to accelerate this year.
As a result, Deutsche Bank does not think the Bank will cut rates at all in 2026, keeping the base rate at 3.75%.
Oxford Economics is more pessimistic, expecting the MPC to keep interest rates where they are until well into 2027, with a cut potentially only on the cards by the end of next year.
