Rachel Reeves has been delivered yet another major blow in the run-up to her make-or-break Budget next month, as the International Monetary Fund (IMF) warned that UK inflation is set to surge to the highest in the G7 in 2025 and 2026.
The beleaguered chancellor has already struggled to foster the economic growth she promised when Labour was elected last year, and the latest outlook report suggests that 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 hospitality prices.
The influential economic body said price inflation in the UK would increase more sharply than expected in both years compared with previous predictions from July. It expects UK inflation to average at 3.4 per cent in 2025, increasing from its previous prediction of 3.2 per cent.
The forecasts also show that UK inflation is expected to slow slightly to 2.5 per cent next year, but this is nonetheless above the 2.3 per cent prediction from earlier this year. But it also came as the IMF increased its UK growth forecast for this year, while reducing its prediction for 2026 amid concerns over the labour market.
The IMF’s report, which has been described as “grim”, casts doubt on the Bank of England’s hopes of bringing interest rates back down to the 2 per cent target rate in the near future.
A higher interest rate could also increase the size of the black hole in the public finances, already estimated to be between £30bn and £40bn, by adding pressure to increase pensions in line with the triple lock guarantee, as well as upping the risk of public sector pay demands.
The IMF’s latest report comes hours after a group of leading economists described Ms Reeves’s situation as “desperate”, with the UK running a structural deficit, and a row taking place within Labour over whether to impose wealth taxes or break the manifesto pledge to hike income tax, VAT or employee national insurance.
In its world economic outlook, which comes as leading politicians and central bank bosses gather in Washington DC, the IMF highlighted that inflation is picking up in the UK and the US.
The most recent figures from the Office for National Statistics (ONS) showed that UK consumer prices index (CPI) inflation struck 3.8 per cent in July and August, marking the highest level since January 2024. The uptick has been linked in particular to accelerating food and hospitality prices, with businesses and industry groups claiming that this has been driven in part by higher labour costs and taxes.
Meanwhile, the UK economy is expected to grow by 1.3 per cent this year, after being boosted by strong growth in the first half. It represents an improvement against the previous IMF forecast of 1.2 per cent. However, the IMF has now cut its growth prediction for next year from 1.4 per cent to 1.3 per cent, as global trade pressures threaten to have an impact on economies around the world.
Canada and France also saw their growth projections reduced amid the fallout from higher tariffs, while the US saw its forecast rise slightly.
Global growth for this year has also been upgraded from 3 per cent to 3.2 per cent in the report, with many economies proving to be more resilient than expected in the face of tariff increases.
The IMF said growth early in the year had surpassed expectations as spending was brought forward, while some countries had also benefited from US tariffs being less punitive than it was feared when they were originally announced.
“Households and businesses front-loaded their consumption and investment in anticipation of higher tariffs,” the report said. “This gave a temporary boost to global activity in early 2025.”
The Tory shadow chancellor, Sir 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.”
But Ms Reeves seized the improved growth estimates to inject a note of optimism. She said: “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.”
