UK inflation is about to hit 4% — exactly double the Bank of England’s target. And unlike your gym membership, this one’s not getting cancelled anytime soon.
While other G7 countries are getting their inflation under control, the UK’s struggling to keep prices in check. Wednesday’s data is expected to confirm what economists have been dreading: we’re the odd one out, and not in a good way. This article breaks down why UK inflation keeps climbing, what’s driving it, and what it means for your wallet.
Why UK Inflation Keeps Climbing
The September consumer price index (CPI) inflation figure is forecast to reach 4%, doubling the Bank of England’s 2% target rate. It’s not just headline inflation either — core CPI (which strips out volatile food and energy prices) is expected to tick up from 3.6% to 3.7%.
The BoE saw this coming. Back in August, their central forecast predicted exactly this scenario. But knowing it’s coming doesn’t make it easier to swallow.
What’s really stinging? Both the IMF and OECD recently confirmed the UK will have higher inflation than every other G7 nation. The OECD went further, saying UK inflation would exceed the G20 average — a group that includes Argentina and Turkey, countries not exactly known for price stability.
What’s Driving Prices Up?
JP Morgan economist Allan Monks points to services inflation as the main culprit. Transport costs remain stubbornly high, petrol prices aren’t budging, and last year’s price drops are now working against us (economists call this “base effects,” but it just means year-on-year comparisons look worse).
There’s a slim chance communications prices and rent could come in softer than expected, potentially taking some edge off the numbers. But don’t bet your savings on it.
Energy Costs: The Gift That Keeps Taking
Goldman Sachs analysts are warning that energy inflation will stay elevated through Q4. That’s bad news for households already stretched thin — and worse news for Chancellor Rachel Reeves ahead of the Budget.
Energy costs are expected to remain volatile thanks to jumpy markets and higher network charges. Goldman’s James Moberly forecasts energy inflation will dip negative in early 2026, but bounce back into positive territory by mid-year.
Despite recent oil price drops, Goldman expects a larger Ofgem price cap increase in Q2 2026, driven by increased policy costs and network charges. Translation? Your energy bills aren’t getting cheaper anytime soon.
Reeves’ Inflation Headache
The Chancellor’s made tackling the cost of living a Cabinet priority. She’s pushing colleagues to focus on policies that actually lower prices — not just sound good in press releases.
Why the urgency? Lower inflation could convince bond markets to buy more short-term gilts, which would push yields down and prevent borrowing costs from spiking further. It’s financial dominoes, and Reeves is trying to keep them standing.
Rumours are swirling that she might strip VAT from household energy bills in the upcoming Budget. It’d cost the Treasury billions in lost tax revenue, but could win over voters and calm nervous bond markets. Sometimes you’ve got to spend money to save money — or at least to save your political skin.
What This Means for You
Double-target inflation isn’t just a statistic — it hits your wallet directly. Your pound buys less, savings lose value faster, and the Bank of England will think twice before cutting interest rates (which means mortgages and loans stay expensive).
The UK’s isolated inflation struggle suggests homegrown issues are at play. While global factors matter, our specific mix of energy policy, labour market tightness, and structural challenges is creating a uniquely British problem.
The Bottom Line
UK inflation hitting 4% confirms we’re in a different boat than our G7 peers — and it’s taking on water. Energy volatility, stubborn services inflation, and unfavourable base effects are creating a perfect storm. Reeves has her work cut out for her, and Wednesday’s figures will only add pressure ahead of the Budget.
Keep an eye on those energy bills, and maybe hold off on that big purchase until we see which way the wind blows.
FAQ
Q1: Why is UK inflation higher than other G7 countries?
A: The UK faces a unique combination of factors: persistent energy costs, tight labour markets pushing up wages, and structural issues in services sectors like transport. While global inflation has cooled, our homegrown challenges haven’t.
Q2: Will the Bank of England raise interest rates again?
A: Not immediately, but 4% inflation makes rate cuts far less likely. The BoE will want to see sustained progress toward the 2% target before considering any loosening. Higher-for-longer is the name of the game.
Q3: How does this affect my mortgage?
A: Elevated inflation keeps interest rates high, which means mortgage rates stay expensive. If you’re on a variable rate or remortgaging soon, brace for higher payments than you might have hoped.
Q4: Could removing VAT from energy bills really happen?
It’s being floated as a Budget option. It would provide immediate relief to households and could help calm inflation fears, but it’d cost the Treasury billions. Political pressure might make it happen.
Q5: When will UK inflation return to target?
A: The Bank of England’s forecast suggests it’ll take well into 2026, with energy volatility keeping things unpredictable. Don’t expect a quick fix — this is a marathon, not a sprint.
DISCLAIMER
Effective Date: 15th July 2025
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