UK braces for highest inflation among major economies this year

Britain is set to experience the highest level of inflation among major economies this year, coupled with slowing growth, a combination that will put mounting pressure on household budgets. 

The Organization for Economic Co-operation and Development (OECD) forecast that the UK’s annual inflation rate will reach 3.5% by the end of 2025, up from 2.5% last year. Core inflation, which excludes volatile items like food and energy, is expected to rise 0.6 percentage points to 3.7%.

According to the OECD, headline and core inflation are projected to be the highest among G7 nations and above the G20 average. This means households will face a noticeable increase in the cost of living, driven by higher prices in shops and rising energy bills. 

Government braces for tax hikes amid rising prices

The government will also face pressure, with Chancellor Rachel Reeves expected to announce significant tax rises in her upcoming budget on November 26.

The OECD highlighted that the UK is among the economies grappling with “mounting food price pressures” and noted that an increasing number of items in the consumer price index are rising faster than the Bank of England’s 2% target. Wage growth is also “above levels consistent with inflation targets,” the report added.

The UK’s stubborn inflation makes it an outlier in Europe, where average rates have fallen to around 2%.

By comparison, US inflation is running at about 2.9% annually, influenced by tariffs and labor supply restrictions stemming from migrant deportations. The OECD expects US inflation to peak at 2.7% this year, down from its previous July forecast of 3.3%.

Economic growth slows as fiscal discipline becomes crucial

The Bank of England estimates headline inflation will peak at 4% in September, double its target level, and markets are not pricing any more interest-rate cuts for the rest of this year. The OECD has nudged its growth forecast for the UK from 1.3% to 1.4% in 2025, making it the second fastest-growing G7 economy behind the US, on course for a rise of 1.8%.

Tariffs and trade uncertainty are expected to drag US growth compared with last year’s 2.4% GDP expansion.

“These numbers show that the UK economy is fundamentally strong and a great place to do business — we are growing faster than any other G7 economy this year,” Chancellor Reeves said. “But I know that there is so much more we can do to build an economy in this country that works for working people, and rewards hard work,” she continued.

UK growth is set to slow to 1% in 2026, reflecting tighter fiscal policy, increased trade costs, and continued uncertainty. According to the OECD, all developing countries had to restore public finances through additional tax revenues and expenditure restraint.

According to the report, fiscal discipline will be necessary to protect long–term debt sustainability and preserve room to react to future shocks. Additionally, stronger efforts to contain and reallocate spending and higher revenues are essential to stabilize debt burdens.

The OECD said the forecast is its first since the Trump administration established a US average tariff rate of 17–19% in July, representing a century-high level of trade protectionism. The report concluded that the full effects of the increased tariffs on imports have yet to be felt.

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