IMF Says UK Will Face Second-Highest Inflation Among G7 Nations

Outlook for Inflation and Growth

The International Monetary Fund warned that the UK will suffer the second-highest inflation rate among G7 countries over the next two years, a development that complicates Chancellor John Healeys efforts to ease the cost-of-living squeeze. In its latest global economic report, the IMF said UK inflation would average 3.3% in 2026 and 2.8% in 2027 well above the Bank of Englands 2% target and marking the seventh consecutive year inflation remains above that benchmark.

Only the United States is expected to experience higher inflation than the UK in the current year, while Germany is forecast to top the G7 next year. The IMF noted that the UK recorded the highest inflation among G7 members in 2025, underlining the ongoing challenge for policymakers as they seek to restore price stability. Interest rates in the UK are also expected to stay higher for longer compared with many peers.

Growth, Risks and Policy Advice

There was a brighter note on growth: the IMF expects UK GDP to expand at a joint-second fastest pace among G7 economies this year, at 1.3%, before slowing to 1.2% in 2027. That places the UKs growth behind only the United States for both years, and in line with Germanys 1.3% expansion projected for this year. On a per-capita basis, however, the UK will trail Italy, Canada and the US in 2026.

The IMF cautioned that its forecasts rely on several important assumptions, including a resumption of trade through the Strait of Hormuz in March 2027 and a moderation in the pace of technology-driven investment next year. The report highlighted two structural influences on the outlook: rapid investment related to artificial intelligence, which is pushing demand and could add upward price pressure, and geopolitical conflicts in Europe and the Middle East that have disrupted supplies of critical goods such as oil and gas.

These factors, combined with higher energy costs and tighter monetary policy, are expected to slow growth next year. Globally, the IMF projects world output will grow by 3.1% this year and 3.4% in 2027.

Against that backdrop, IMF economists urged governments including Chancellor Healeys administration to use any windfall revenue from stronger growth or lower energy prices to bring down public borrowing rather than to fund large, open-ended support packages. The report recommended that extra fiscal support for households or firms be deployed sparingly so as not to complicate central banks efforts to control inflation.

Bank of England Governor Andrew Bailey has echoed that message, warning that governments must not leave the burden of maintaining price stability solely to central banks. Senior officials from central banks and governments, including Bailey and Healey, are meeting in Thailand for IMF gatherings where these issues are expected to be high on the agenda.

Overall, the IMFs assessment underlines a narrow policy path for the UK: navigate persistent inflation and the prospect of prolonged higher interest rates while sustaining better-than-average growth and prioritise fiscal consolidation when opportunity allows to preserve policy flexibility for future shocks.