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?
UK inflation was unexpectedly steady in May, but experts warn that higher inflation could be on horizon as the UK starts to feel the economic consequences of the Iran war.
Inflation was 2.8% in the year to May, holding at the same level it was in April, according to the latest data from the Office for National Statistics (ONS).
Most experts had anticipated price growth to rise after oil and gas prices soared in the wake of the Iran war.
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However, the economy proved to be more resilient than most expected. One driving factor in May’s data was low food inflation.
In the year to May, food prices grew by 2.2%, the slowest rate in 17 months. This helped push overall inflation down by 0.07 percentage points.
Other notable downwards contributions to the inflation rate came from the housing and household services, furniture, clothing, restaurant, and recreation sectors.
Meanwhile, the largest upwards contributor was the transport sector, where inflation was 6.8% in the year to May. Price growth for airfares, vehicle taxes, and motor fuel costs pushed May’s overall inflation up by 0.29 percentage points.
However, while lower-than-expected inflation in May was a positive sign, experts have warned that low inflation is unlikely to hold.
Where could inflation go next?
Experts think inflation is likely to rise in the following months as we continue to feel the effects of disrupted global trade thanks to the Iran war.
In particular, the war 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, being shut.
That made oil prices surge, 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 be felt more widely.
While the Iran war looks to be winding down, with a memorandum of understanding set to be signed, oil prices have fallen. However, it will still be some time before they go back to pre-war levels as the production and distribution of oil needs to be restarted.
With prices remaining at elevated levels, inflation will still likely tick up in the UK during the rest of the year.
Meanwhile, the energy market is also under pressure because of the war.
Energy bills for millions of households and businesses will increase in July 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 households on the price cap will be paying an average of 13% more for their energy than they did between April and June.
Prices are set to stay high in the final quarter of 2026 too, with energy consultancy Cornwall Insight, whose price cap forecasts are well-regarded, expecting the price cap to rise by a further 2% in October.
Before the war, the consultancy thought energy prices would be around £1,645 in July this year – more than £200 lower than July’s confirmed level.
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 (such as energy bills and transportation costs) are still exposed to those markets. These costs will likely be passed on to the consumer.
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.
The latest forecast from the Bank of England estimates that inflation will stay just under 3% for most of 2026 before rising to a “little over” 3.25% in the final quarter of the year.
While this means that inflation is likely going to stay well above the 2% target for the rest of the year, the positive news is that this latest prediction is significantly better than the one produced by the central bank in April, which said prices could peak at 3.6% this year in their best-case scenario or 6.2% in their worst-case scenario.
Deutsche Bank expects inflation is set to rise in 2026, but to a less extreme peak than previously thought.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “With a US-Iran [memorandum of understanding] in sight, the prospects of a softer rise in CPI have increased.
With oil prices dropping meaningfully, this is expected to slowly filter through to the overall inflation data over the summer and winter, helping it stay lower than previously expected, he said.
Raja added: “And, in even better news, the fall in oil prices has coincided with a fall in gas prices. It’s looking increasingly likely that the Ofgem price cap could be lower as opposed to higher come October 2026, bringing some much-needed relief for UK households and businesses.”
While this news is positive for the inflationary outlook in the UK, it all rests on the assumption that inflation will still be above target for the entire year.
And though expectations are now far from April’s worst-case scenario, it still means prices will accelerate one percentage point faster than many economists had previously expected in 2026.
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?
With inflation expected to stay significantly above the Bank of England’s target, interest rates are unlikely to be cut any time soon.
In the most recent meeting of the Monetary Policy Committee on 18 June, members decided to hold interest rates at 3.75% for the fourth consecutive meeting. The motion passed by seven to two.
The two members who did not vote with the majority (Huw Pill and Megan Greene) voted to hike rates to 4% as a preventative measure against the potential for more severe second-order inflationary effects.
This move was in line with most forecasts by economists, and experts believe that interest rates will stay at 3.75% until at least early 2027.
Deutsche Bank believes that the first time we could potentially see a rate cut on the table again is spring 2027. Meanwhile, Oxford Economics believes that the first cut may be seen in late 2027.
For more on the future of interest rates, read our article on where interest rates will go next.
