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UK inflation forecast: where are prices heading next?
With conflict in the Middle East disrupting the global economy, inflation is now expected to rise in the UK. What’s next for prices?
UK inflation is set to rise in the rest of 2026 and the start of 2027 as the country continues to be hit by the economic shocks from the Iran war.
Soaring energy and motor fuel prices caused by the war are driving price growth with the pain to be felt most acutely this winter as households pay more to heat their homes and fill up their vehicles.
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The rise in September was largely driven by sharp price rises in the transport sector, where inflation rose overall to 6.6% in the year to September 2026, up from 4.6% in the previous month.
The motor fuels sub-section experienced particularly strong inflation in the year to September, rising by 29.8%.
Meanwhile, inflation in the health, alcohol and tobacco, clothing, and restaurant and hotels sectors slowed, partially offsetting the overall rise.
September’s data is consistent with the expert consensus that inflation will continue rising.
Why are prices rising?
Since 28 February, the Iran war has disrupted the global economy, with the oil, gas, and energy industries being especially affected.
One particularly economically damaging aspect of the war has been the closing of the Strait of Hormuz, a narrow waterway between Iran and Oman through which around 20% of the world’s oil and gas is transported.
As the strait has shut off a large proportion of the oil and gas supply, oil prices have surged, impacting motor fuel and heating oil prices.
As long as the Iran war continues, and trade through the Middle East remains more dangerous, prices are expected to stay high.
The war is also impacting the energy market, pushing up costs for millions of households and businesses in the UK.
The Ofgem energy price cap, which dictates the maximum a supplier can charge for a unit of energy, rose by 4% in October, bringing the average annual household energy bill to £1,723 a year.
The price cap is also expected to rise by an additional 16% on 1 January, according to energy consultancy Cornwall Insight, which would bring the average annual household bill to £1,999.
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.
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, although the Bank of England said in September that they have not seen strong evidence of this happening yet.
Where do experts think inflation will go?
Most economists think inflation will remain above the Bank of England’s 2% target for the rest of 2026, with price growth expected to peak in early 2027 before gradually unwinding.
The Bank of England central forecast is that inflation will average around 3.75% in the final quarter of 2026, according to their latest estimates from 18 September.
They believe that rising inflation will largely be driven by increased energy and fuel prices.
The Bank’s analysis of August’s inflation data showed that around 0.7 percentage points of the month’s 3.1% inflation rate was the direct effect of heightened energy and motor fuel prices.
With energy prices now at even higher levels than they were in August, the central bank estimates that inflation will edge up to 4% in the first quarter of 2027.
Deutsche Bank agrees that inflation is likely to rise in the coming months, also expecting it to reach around 4% by the start of 2027.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “[September’s] inflation data confirmed what we all expected: price pressures are firming and inflation remains on an upward trajectory. Despite [September’s] uncomfortable jump in CPI, there’s more to come.”
He added that while food inflation is moving surprisingly slowly, price growth is “moving broadly as we expected”.
However, he warned “food price pressures would be hard to ignore for much longer. Despite fierce supermarket competition, higher energy and weather-related shocks will push seasonal and processed food prices up over the next year or so”.
The average forecast from economists surveyed by the Treasury on 21 October is that inflation will rise to 3.6% in the final quarter of 2026. By Q4 2027, they expect inflation ease to an average of 2.4%.
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.
The three members who did not vote with the majority (Huw Pill, Megan Greene, and Catherine L Mann) called for a rate hike to 4% as a preventative measure against the potential for more severe second-order inflationary effects.
They represent a cohort of the MPC that are becoming more vocal that the MPC should increase interest rates rather than remaining in a “wait-and-see” position.
More economists are now predicting that the MPC will increase interest rates this year as the Bank contends with rising inflation.
Deutsche Bank now thinks the central bank will hike interest rates twice in the coming months. They had previously expected interest rates to remain on ice for at least the rest of this year.
Raja said: “For the Bank of England, despite few signs of second-round effects emerging yet, we expect the MPC to remain highly vigilant to knock-on effects.
“The case for insurance hikes, as we’ve argued, is gaining momentum, particularly with the inflation normalisation process likely to be delayed further by ongoing tensions in the Middle East. We continue to think the BoE will lift [the] Bank Rate twice over the coming months.”
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Daniel is a financial journalist at MoneyWeek, writing about personal finance, economics, property, politics, and investing.
He covers savings, political news and enjoys translating economic data into simple English, and explaining what it means for your wallet.
Daniel joined MoneyWeek in January 2025 and previously worked at The Economist in their Audience team. He read history at Emmanuel College, Cambridge and edited Cambridge's student newspaper, Varsity.
In his free time, he likes reading, walking around Hampstead Heath, and cooking overambitious meals.
