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
Inflation looks to be on the rise after conflict in the Middle East scuppered hopes of a return to the 2% target in 2026.
Prices rose by 3.3% in the year to March 2026, according to the latest data from the Office for National Statistics (ONS), up from 3% in the year to February 2026.
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Where has inflation gone recently?
The CPI measure of inflation was 3% in January 2025, before peaking at 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, mostly because of the rising prices of products exposed to the oil markets, which have been heavily disrupted due to the Iran war.
The UK has already been hit by soaring 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 now expected to rise in the summer as the next Ofgem energy price cap will reflect the increased wholesale price of energy because of the war.
Energy consultancy Cornwall Insight’s latest forecasts suggest the Ofgem price cap will rise by 12% (£195) to £1,836 per year 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, almost £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.
However, these effects may not be reflected in the ONS’s next set of inflation data.
As the Consumer Prices Index (CPI) measures how much prices have grown over 12 months, figures can be distorted by negative or positive base effects.
Sanjay Raja, chief UK economist at Deutsche Bank, notes that this is expected to be the case for the upcoming April inflation data.
In April 2025, which was dubbed “awful April”, there were a number of bill rises, meaning the inflation data for that month was unusually high.
That means that the percentage change in prices between April 2025 and April 2026 is expected to be lower than the same change between March 2025 and March 2026.
Raja explained: “Price momentum, we think, will drop from March as negative base effects drag on the annual price calculation. Put simply, annual price resets won't be as large this year as they were last year – especially in the services basket.”
However, inflation falling on the month is unlikely to be a cause for celebration as prices are still expected to grow this year.
Raja said: “Looking ahead, we expect price momentum to pick back up as the Iran shock catches up with the inflation data. Indeed, dual fuel bills won't rise until the summer. Rising food and core goods inflation, we expect, will also push momentum a tad higher. Risks to our projections remain skewed to the upside.”
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.
The MPC voted to hold rates at 3.75%, 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.
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.
