UK facing highest inflation in G7 in yet another pre-Budget blow for Rachel Reeves
Rachel Reeves has suffered another major blow as she approaches next month’s budget, with the International Monetary Fund (IMF) warning UK inflation will rise to the highest level in the G7 in 2025 and 2026.
The beleaguered chancellor has already struggled to stimulate the economic growth he promised when Labor was elected last year, and the latest outlook shows UK households are expected to face the highest rate of price inflation among the G7 group of advanced economies, driven in part by rising food and accommodation prices.
Price inflation in the UK will rise more sharply than expected in both years compared to previous forecasts in July, the influential economic body said. It expects inflation in the UK to average 3.4 percent in 2025; higher than the previous estimate of 3.2 percent.
Forecasts also show that UK inflation is expected to slow slightly to 2.5 per cent next year, but this is still above the 2.3 per cent forecast earlier this year. But it also comes as the IMF raised its UK growth forecast for this year but lowered its forecast for 2026 due to concerns about the labor market.
The IMF report, described as “brutal”, casts doubt on the Bank of England’s hopes of cutting interest rates to a target rate of 2 per cent in the near future.
As well as increasing pressure to increase pensions in line with the triple lock guarantee, a higher interest rate could also increase the size of the black hole in the public finances, currently estimated at between £30bn and £40bn, by increasing the risk of public sector pay claims.
The IMF’s latest report came just hours after a group of leading economists described Ms Reeves’ situation as “hopeless”; There was a structural deficit in the UK and there was a debate within the Labor Party about whether to impose wealth taxes or break its manifesto commitment to increase income tax, VAT or workers’ national insurance.
The IMF underlined that inflation is recovering in the UK and the USA in the world economic outlook that emerged when leading politicians and central bank bosses came together in Washington DC.
The latest figures from the Office for National Statistics (ONS) showed UK consumer price index (CPI) inflation reached 3.8 per cent in July and August, the highest level since January 2024. The increase is particularly linked to increases in food and accommodation prices; Business and industry groups claim this is partly due to high labor costs and taxes.
Meanwhile, the UK economy is expected to grow by 1.3 percent this year, following strong growth in the first half. This represents an improvement from the IMF’s previous estimate of 1.2 percent. However, as global trade pressures threaten to affect economies around the world, the IMF reduced its growth forecast for next year from 1.4 percent to 1.3 percent.
Canada and France also saw their growth forecasts fall due to the effects of higher tariffs, while the US saw its forecasts rise slightly. This year’s global growth was also increased from 3 percent to 3.2 percent in the report; Many economies have proven more resilient to tariff increases than expected.
The IMF said growth exceeded expectations at the beginning of the year as spending was brought forward, and some countries benefited from US tariffs being less punitive than feared when they were first announced. “Households and businesses front-loaded their consumption and investment in anticipation of higher tariffs,” the report said. “This provided a temporary boost to global activity in early 2025.”
IMF chief economist Pierre-Olivier Gourinchas said the UK was “doing the right thing in terms of growth” but added: “Inflation [in the UK] In 2024 it was 2.5 percent and now it’s 3.4 percent, so it looks like it’s heading in the wrong direction.
“But there are some factors behind this that we see as temporary factors, such as earlier declines in some components of the basket such as regulated prices, transport prices, water prices and energy prices, falling outside the window in which we calculate the inflation rate.”
But Sir Mel Stride, the Tory shadow chancellor, said: “The IMF assessment makes depressing reading. Inflation in the UK will now be the highest in the G7 this year and next year and will rise faster than expected because of the choices Rachel Reeves has made.”
“Since taking office, Labor has allowed the cost of living to rise, debt to balloon and business confidence to fall to record lows. Taxes are rising to record levels and families are under pressure from all sides. Labor must rein in spending to reduce borrowing and avoid damaging tax rises, but Starmer and Reeves are too weak to do this.”
But Ms Reeves used improved growth forecasts to strike a note of optimism. He said: “This is the second year in a row that the IMF has raised its growth forecast for this year. It’s no surprise, the UK led the G7 in growth in the first half of this year and average disposable income has risen by £800 since the election.”
“But know that this is just the beginning. For many people our economy looks stuck. Working people feel it every day, experts are talking about it and I will deal with it. Working together we can create a Britain built for everyone.”
