The UK is set to experience the highest inflation rate among the G7 economies over the next two years, according to new forecasts from the International Monetary Fund (IMF).
The fund also warned that British living standards are likely to improve at the slowest pace in the group of major advanced nations.
In its latest World Economic Outlook, the IMF said inflation in the UK is expected to average 3.4% this year and ease to 2.5% in 2026, both higher than previously forecast. Prices are rising faster in Britain than in other developed economies and, according to the IMF, even more quickly than in some emerging nations such as Peru and Senegal.
At the same time, the fund expects real GDP per person, a common measure of living standards, to rise by just 0.5% in 2026, compared with 1.8% in the US, 1.2% in Japan, and 0.9% in the eurozone.
The projections come as Chancellor Rachel Reeves prepares to deliver her next budget in November, which is expected to include further tax rises and spending restraint. The IMF said the UK’s “sticky” inflation and slow productivity growth have contributed to rising government borrowing costs.
Speaking in Washington, Athanasios Vamvakidis, a deputy director at the IMF, said:
“Clearly markets are concerned about the UK economy, and we have seen more volatility in the UK compared to other advanced economies recently. The market is asking for more details on the fiscal plans in the UK. So yields as a result are higher in the UK compared to other advanced economies.”
The IMF slightly raised its forecast for overall UK economic growth this year to 1.3%, but trimmed its outlook for 2026 to the same rate. It also urged the government to present a “credible plan” to reduce debt and support growth, warning that investor confidence could falter otherwise.
Chancellor Reeves said the latest IMF report marked a second upgrade to growth forecasts for this year, adding:
“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.”
However, she also acknowledged that for many people “the economy feels stuck”.
The IMF’s warnings were echoed by officials at the Bank of England. Senior economist Alan Taylor said the UK risked a “more forceful downturn” and possible recession, while Governor Andrew Bailey noted growing concerns from businesses about a “softening” labour market.
Official figures released this week showed that unemployment rose to 4.8% in the three months to August, the highest level in four years since the Pandemic. Bailey said weak productivity growth had effectively set a “speed limit” for the UK economy, which may need to be restrained by keeping interest rates higher for longer.
The fund also warned that changes to regulated prices, such as household energy and water bills, could keep inflation elevated through 2025. It noted that the government’s £25bn increase in employer National Insurance contributions had added further cost pressures for businesses.
Meanwhile, the IMF downgraded the UK’s long-term growth prospects and said the benefits of a potential trade deal with the United States would not offset the impact of higher tariffs introduced by former US President Donald Trump.
GDP per head, a key measure of living standards, has fallen in the UK over the past two years as population growth from immigration has outpaced the expansion of the economy.
The forecasts represent a setback for Prime Minister Sir Keir Starmer’s pledge to make improving living standards a central goal of his government. Labour has set an ambition for Britain to record the fastest growth in per-person GDP in the G7 by the end of the current parliament, a target that the IMF now says is unlikely to be met.
Responding to the figures, Andrew Griffith, the shadow business secretary, said the slowdown in living standards should serve as a “wake-up call” for the government.
“Rachel Reeves must change course ahead of her Budget,” he said. “She could get things moving by ruling out more tax rises and instead put public sector spending on an Ozempic-type diet.”
Globally, the IMF upgraded its forecast for world economic growth to 3.2% this year, saying the global economy had shown “unexpected resilience”. But it also warned of risks from high stock market valuations and said optimism over artificial intelligence could lead to a “correction” in share prices if returns fall short of expectations.
