UK inflation forecast: where are prices heading next?

Inflation in the UK was 3.8% in September, lower than the 4% that most analysts expected, remaining at the same level it was in both August and July.

But despite better-than-expected inflation in September, the reading is a small cause for celebration as price growth is still at its highest level since February 2024.

A variety of price movements meant that inflation was static last month, with the largest upward pressures coming from petrol prices and airfares, according to the Office for National Statistics (ONS).

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These upward pressures were offset by lower prices for recreational and cultural purchases, such as live events, while food inflation fell for the first time since May last year.

The annualised inflation rate for food and non-alcoholic beverages was 4.5% in September, down from 5.1% in August and 4.9% in July.

Most forecasters expected that inflation, as measured by the Consumer Prices Index, would reach a peak of 4% in September and then fall in the following months.

The UK has managed to come out relatively unscathed compared to expectations, and price growth is still forecast to decline over the next year.

We look more closely at where prices are heading next.

When will inflation come down?

The worst of inflation could be over for the time being following September’s reading.

The Bank of England’s most recent Monetary Policy Report, published in August, said it expects inflation to peak in September and then start falling closer to target, with price growth averaging 3.75 in the second half of 2025.

The central bank then expects inflation will fall to 2.7% by the third quarter of 2026, and finally settle back around the 2% target by the second quarter of 2027.

While the Bank of England’s inflation forecast is one of the most closely watched, other organisations also try to predict inflation.

Deutsche Bank forecasts that inflation will average 3.4% in 2025, before stepping down to 2.6% in 2026. The bank expects a particularly large step down in services inflation next year, going from an average of 4.8% in 2025 to 3.4% in 2026.

The median expected inflation reading for the last quarter of 2025 among economists surveyed by the Treasury on 15 October was 3.6%.

Meanwhile, the median expected inflation rate among the same forecasters for Q4 2026 is 2.4%. All forecasters surveyed said they anticipate inflation will be lower in Q4 2026 than Q4 2025.

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 tradeoff 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 high this year, the Bank of England has been gradually cutting rates since the summer of 2024.

Will high inflation stop further interest rate cuts?

The Bank of England chose to keep interest rates at 4% at the most recent Monetary Policy Committee (MPC) meeting on 18 September.

The motion to keep the base rate at 4% was passed by seven to two, showing how even the more dovish members of the MPC are concerned about the potentially inflationary impact of an interest rate cut.

High inflation is making base rate cuts much more difficult to justify than they were in the first half of 2025 when inflation was much lower. Expectations of future base rate cuts have therefore been adjusted accordingly.

The question of whether the MPC will lower interest rates again before the end of 2025 is more open, assuming the worst of this bout of inflation is behind us.

Sanjay Raja, chief UK economist at Deutsche Bank, said that September’s lower-than-expected inflation reading “sets up an interesting debate on whether there may be enough ammunition for the MPC to [cut rates] in November as opposed to our base case of December”.

Raja says “one could make the argument that the ingredients for a November rate cut are there” as economic growth is lower than the Bank’s estimates, earnings growth is down more than expected, unemployment is up, and inflation is below the Bank’s projections.

On the other hand, the next MPC meeting, on 6 November, comes at an awkward time.

Chancellor Rachel Reeves’s Autumn Budget is due to be given on 26 November, and the central bank may want to wait to see what is announced before potentially lowering interest rates.

The Bank will also have far more data available by the final MPC meeting of the year, on 18 December, as two more inflation readings will be published as well as the Low Pay Commission's National Living Wage announcement.

Raja said: “Either way, we now see [a November base rate cut] as a close call. For now, with two additional CPI prints to watch, and two further labour market reports to come before the December meeting, we think there will be enough ammunition for the MPC to ease rates further.

“And with Chancellor Reeves laying the groundwork for lowering the cost of living in the upcoming Budget, we think that another rate cut this year is very much in play.”