UK faces worst G-7 inflation and flat living standards, IMF says
The global economic watchdog warned that UK inflation could be even higher than its latest forecasts
[LONDON] Inflation will be higher in the UK than any other major advanced economy both this year and next, surpassing the US despite the impact of tariffs, according to the International Monetary Fund.
The global economic watchdog warned that UK inflation could be even higher than its latest forecasts that showed consumer prices rising 3.4 per cent this year and 2.5 per cent in 2026. Across the two years, prices will rise 6 per cent – almost a percentage point more than in the US where President Donald Trump’s import barriers are starting to drive up costs for American consumers.
While the IMF expects high inflation to be “temporary,” its chief economist Pierre-Olivier Gourinchas warned that there are upside risks from wage costs and rising household inflation expectations.
“That’s a sign somehow households and firms in the UK are becoming maybe a little bit less certain that inflation will be coming down quickly,” he told a press conference in Washington on Tuesday (Oct 14). “The path forward for the Bank of England should be very cautious in its easing trajectory.”
The gloomy forecast is accompanied by an equally downbeat prediction for living standards, with the IMF calculating GDP per person will lag every other Group of Seven economy next year despite Britain being one of the better performers when it comes to aggregate output.
It comes after official figures earlier Tuesday showed real wages are now barely rising as pay growth slows and inflation accelerates to almost double the 2 per cent target.
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The BOE is divided over how quickly to cut interest rates again, with hawkish policymaker Megan Greene and dove Alan Taylor striking contrasting tones over the past two days. Data on Tuesday showing a surprise rise in unemployment prompted traders to add to bets on further cuts. They are now pricing in two quarter-point reductions through next year, with the first expected by March.
Rising prices and stalling living standards paint a bleak picture for Chancellor of the Exchequer Rachel Reeves ahead of what’s expected to be a challenging budget next month. Reeves has been accused of contributing to the problem by hiking the minimum wage and employer payroll taxes earlier this year.
The IMF warning echoes the Organisation for Economic Cooperation and Development, which predicted last month that Britain will suffer the fastest inflation in the G-7.
The IMF described the UK inflation overshoot as a “surprise” and blamed “regulated prices” like water and energy bills. Inflation should prove temporary and return to target by the end of 2026 as rising unemployment moderates wage growth, the IMF said. The US does not get back to 2 per cent until 2027.
Gourinchas said UK inflation was also being pushed up by “some earlier declines in some components of the basket, like energy prices, sort of moving out of the window.”
“You see some normalisation coming from that,” he said. “The UK is both maybe the highest inflation in G-7 but also above average growth in the G-7, so it’s actually doing something right in terms of growth, at least.”
Japan faces the next largest inflation shock, at 5.5 per cent over the two years, followed by the US at 5.2 per cent where prices are driven higher by “the impact of tariffs,” the IMF said in its twice-yearly World Economic Outlook.
Economists believe Reeves will have to raise billions of pounds in tax to fill a hole in her spending plans caused by higher borrowing costs, policy U-turns and an anticipated growth downgrade by the Office for Budget Responsibility. Bloomberg Economics and Capital Economics say her measures will knock around 0.2 per cent off GDP.
In its latest forecasts, the IMF says the UK will be the second-fastest growing G-7 economy behind the US in 2025 and the third fastest in 2026 after the US and Canada. It upgraded growth to 1.3 per cent from 1.2 per cent this year and downgraded it to 1.3 per cent from 1.4 per cent for next.
Adjusted for the population, however, GDP is forecast to grow just 0.4 per cent this year and fall to the bottom of the pack in 2026 with an increase of 0.5 per cent. Per capita growth is considered a better gauge of living standards than aggregate GDP.
Responding to the IMF forecasts, Reeves said: “This is the second consecutive upgrade to this year’s growth forecast from the IMF. It’s no surprise, Britain led the G-7 in growth in the first half of this year, and average disposable income is up £800 (S$1,385) 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.”
The fund’s forecasts also revealed the scale of the fiscal challenge Reeves faces to stabilise a debt burden that is now almost equal to the size of the economy.
The UK needs to run a small primary surplus, which means paying for all spending except debt interest out of tax, from this year, tables in the report showed. In March, the OBR forecast that the goal will not be achieved until 2027-28. BLOOMBERG
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