Inflation in Britain is forecast to be the highest among all advanced economies in 2025 and 2026, according to new predictions by the International Monetary Fund (IMF), in a pre-Budget blow to chancellor Rachel Reeves.
Price growth in the UK is now predicted to have averaged 3.4% in 2025, up 20 basis points from the IMF’s July prediction of 3.2%, making it the highest among all advanced economies, says the World Economic Outlook report.
The predicted high average annual inflation rate will be no surprise to those who have followed the trajectory of CPI this year. It stood at 3% in January and was recorded at 3.8% in August.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The official figures for September are yet to be published, but the Bank of England expects inflation to have peaked at 4% last month.
Latest Videos FromMoneyWeek
The IMF says the rise in headline inflation in the UK in 2025 is partly due to the changes in regulated prices (those controlled by the government), many of which increased in ‘Awful April’.
The pain is set to continue into next year too as inflation is expected to average 2.5% in 2026, another 20 basis points higher than the IMF’s previous prediction (2.3%).
Thankfully, inflation is expected to fall much closer back towards the Bank of England’s 2% target by the end of 2026, which the IMF says will be helped by “a loosening labour market and moderating wage growth”.
The IMF’s prediction of inflation falling in 2026 is one shared by most inflation forecasters, including the Bank of England.
Meanwhile, the UK is also expected to endure the highest long-term borrowing costs of any major economy, putting further pressure on Reeves as she attempts to balance the books before her Autumn Budget.
2025 growth forecast is the silver lining
One area that the UK did lead in was economic growth, which is expected to average 1.3% in 2025, 20 basis points higher than the IMF’s previous forecast (1.1%), making it the second-fastest growing major economy after the United States.
However, economic growth forecasts have been downgraded for 2026 as UK GDP growth is expected to remain at 1.3%, down from the 1.4% predicted in July.
Chancellor Rachel Reeves welcomed the upwards growth revision for 2025, saying: “This is the second consecutive upgrade to this year's growth forecast from the IMF. It’s no surprise, Britain led the G7 in growth in the first half of this year, and average disposable income is up £800 since the election.
“But know this is just the start. For too many people, our economy feels stuck. Working people feel it every day, experts talk about it, and I am going to deal with it. Working together, we can deliver a Britain built for all.”
IMF report ‘grim reading’ ahead of the Budget
In contrast to Reeves’s upbeat response, Conservative shadow chancellor Mel Stride said: “The IMF assessment makes for grim reading. Inflation in the UK is now set to be the highest in the G7 this year and next – rising faster than expected because of the choices Rachel Reeves has made.
“Since taking office, Labour have allowed the cost of living to rise, debt to balloon, and business confidence to collapse to record lows. Taxes are rising to record highs, and families are being squeezed from all sides. Labour should be getting spending under control to bring down borrowing and avoid damaging tax rises, but Starmer and Reeves are simply too weak to do it.”
It’s not just Reeves’s political opponents who saw more bad than good in the IMF’s report.
Lindsay James, investment strategist at Quilter, said: “Despite the small uptick in growth forecasts from the IMF, today’s report is not welcome reading for the Treasury ahead of what is a crucial Budget in just over a month’s time.
“This should be a shot across the bows for Rachel Reeves. The next Budget must not push yet more costs onto businesses at a time when inflation risks becoming more embedded; it ultimately ends up being shouldered largely by consumers, the very ‘working people’ she has said she wants to protect.
“She will need to come to the despatch box with genuinely pro-growth policies or face the reality that spending will need to be reined in to ease the nation’s debt burden. It is an unenviable position given neither are particularly easy to achieve.”
