What's happened
The IMF reports UK inflation will rise more sharply than expected in 2025 and 2026, reaching the highest in the G7. Despite this, the IMF has increased its growth forecast for 2025 but lowered it for 2026, amid concerns over the labour market and global trade pressures. UK households face rising costs, especially food and hospitality, impacting consumer spending and retail. Policymakers face a challenge in balancing inflation control with economic growth.
What's behind the headline?
The IMF’s latest report underscores a complex economic landscape for the UK. Despite an upward revision in 2025 growth forecasts, inflation is projected to be the highest in the G7 over the next two years, driven by food, hospitality, and labour costs. This creates a paradox: the economy is growing, yet households are squeezed by rising prices. The forecast suggests that the Bank of England will find it increasingly difficult to cut interest rates without risking further inflation. The divergence between growth and inflation highlights a fragile recovery, with policymakers caught between supporting growth and controlling inflation. The emphasis on rising costs and global tariffs indicates that external pressures will continue to influence domestic economic stability, potentially leading to a prolonged period of cost-push inflation and subdued consumer confidence. The outlook also hints at a potential fiscal squeeze, as increased public spending on pensions and public sector wages could widen the fiscal deficit, complicating the government’s economic strategy.
What the papers say
The Scotsman highlights the immediate impact of rising inflation on Scottish businesses, with industry groups warning of price hikes and passing costs onto consumers. The Independent emphasizes the broader economic outlook, noting the IMF’s upward revision of UK growth for 2025 and the challenges posed by inflation and the labour market. The Mirror focuses on the implications for interest rates, suggesting that the rising inflation makes future rate cuts less likely, which could impact borrowing costs and consumer spending. All sources agree that inflation is a pressing concern, but they differ in their emphasis: The Scotsman on business costs, The Independent on macroeconomic forecasts, and The Mirror on monetary policy implications.
How we got here
Recent IMF outlooks reflect ongoing economic pressures in the UK, driven by rising costs, higher taxes, and international tariffs. The UK economy experienced strong growth in the first half of 2025, prompting a slight upgrade in growth forecasts, but inflation remains a concern. The forecasts are influenced by global trade tensions, domestic cost increases, and policy responses, with the Bank of England under pressure to manage inflation without stifling growth.
Go deeper
Common question
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Why Is UK Inflation Rising Despite Economic Growth?
The UK economy is showing signs of growth, yet inflation continues to rise. This paradox raises questions about what's driving inflation and what it means for consumers and businesses. Below, we explore the key factors behind this trend, what the IMF forecast indicates, and how policymakers are responding to these economic challenges.
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