The UK’s economy just got some tough news. The International Monetary Fund (IMF) says Britain will see the highest inflation across all G7 nations over the next two years—yes, even higher than the US despite Trump’s tariffs. Meanwhile, growth per capita is lagging behind other advanced economies.
So what’s driving these gloomy forecasts, and what does it mean for your wallet? Let’s break it down.
Why Is UK Inflation So Stubborn?
The IMF’s World Economic Outlook report predicts UK inflation will hit 3.4% in 2025, dropping to 2.5% in 2026. That’s higher than Italy, the US, and most of our peers.
The culprit? Regulated prices—think energy and water bills—are keeping costs elevated. Your utility bills aren’t coming down anytime soon.
There’s a silver lining though. The IMF expects inflation to fall back to the Bank of England’s 2% target by late 2026, thanks to a cooling labour market and slower wage growth. Not exactly thrilling news if you’re hoping for a pay rise.
For context, US inflation is forecast at 2.7% this year and 2.5% next year. The UK now has the uncomfortable distinction of being flagged by both the IMF and OECD for its inflation troubles.
UK Growth: Upgraded But Still Underwhelming
The IMF bumped up its 2025 growth forecast to 1.3%—but downgraded 2026 from 1.4% to 1.3%. It’s an upgrade, sure, but hardly something to pop the champagne over.
What helped? A boost in activity during early 2025 and the UK-US trade deal signed in May gave the economy a lift. Still, growth is 0.4 percentage points lower than the IMF predicted a year ago.
The US, by comparison, is cruising with 2% growth this year and 2.1% next year. Germany, France, and Japan are trailing behind the UK, but that’s cold comfort.
Per Capita Growth: The Real Problem
Here’s where things get rough. On a per capita basis, UK growth is just 0.4% this year and 0.5% next year—way below the advanced economy average of 1.2% and 1.4%.
Translation? The average Brit isn’t feeling much richer. Even if GDP ticks up, population growth means individual prosperity isn’t keeping pace.
Chancellor Rachel Reeves tried to spin the news positively, celebrating the “second consecutive upgrade” and pointing to Britain leading G7 growth in the first half of the year. She also noted disposable income is up £800 since the election.
But Shadow Chancellor Mel Stride wasn’t buying it. He slammed the report as “grim reading,” blaming Labour’s policies for rising living costs, ballooning debt, and collapsing business confidence.
The Debt Problem Isn’t Going Away
The IMF also sounded the alarm on rising borrowing costs. With interest rates still elevated and fiscal deficits deepening, many advanced economies—including the UK—are walking a tightrope.
The report warned fiscal policy is “too loose” and urged governments to stabilise debt-to-GDP ratios. Aging populations, defence spending, and energy security are piling on extra pressure, especially in Europe.
Reeves echoed this concern in a Cabinet meeting, stressing the need to bring down public debt and curb inflation. She hinted that the upcoming Budget will likely mean higher taxes and increased costs for households. Fun times ahead.
What About Trump’s Tariffs?
Interestingly, the IMF was less doom-and-gloom about Trump’s tariffs than expected. It said countries have “shown resilience” because the shocks “materialised on a smaller scale than expected.”
That said, the UK has been hit harder than others by falling exports to the US. Uncertainty around global trade remains high, and the US-China relationship will be a key factor over the next few months.
The Bottom Line
The UK’s facing the highest G7 inflation for the next two years while growth per capita lags behind. Between rising energy bills, stubborn price growth, and an upcoming Budget that’ll likely hit your wallet, it’s not exactly smooth sailing ahead.
Want to stay ahead of the UK’s economic shifts? Keep tabs on inflation reports and Budget announcements—they’ll directly impact your finances.
FAQ
Q1: Will UK inflation stay above 3% for long?
A: The IMF expects inflation to drop from 3.4% in 2025 to 2.5% in 2026, reaching 2% by late 2026. Cooling wages and a softer labour market should help bring prices down.
Q2: Why is UK inflation higher than the US despite Trump’s tariffs?
A: Regulated prices—especially energy and water bills—are keeping UK inflation elevated. The US is seeing tariff-related price increases, but they’re not pushing inflation as high as Britain’s structural cost pressures.
Q3: What does low per capita growth mean for me?
A: It means even if the economy grows overall, the average person isn’t seeing much benefit. Your individual prosperity and living standards aren’t improving at the same rate as the headline GDP figures suggest.
Q4: Is the UK-US trade deal helping the economy?
A: Yes, the deal signed in May gave the UK a modest boost and improved the 2025 outlook. However, falling exports to the US and trade uncertainty are still weighing on growth.
Q5: What should I expect from the upcoming Budget?
A: Rachel Reeves has signalled higher taxes and measures to curb inflation and debt. Households should prepare for increased costs as the government tries to stabilise public finances.
DISCLAIMER
Effective Date: 15th July 2025
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