Introduction to UK Inflation Forecast
The latest UK inflation data is expected to show a slight increase in the Consumer Prices Index for December 2025. According to the latest FactSet consensus, CPI will have risen to 3.3% for the 12 months to December from the 3.2% in the 12 months to November. Core inflation, which removes the effect of volatile food and energy prices, is also forecast to have risen from 3.2% to 3.3%.
Key Takeaways
- A modest increase in inflation is forecast for the end of 2025.
- The Bank of England is not forecast to lower interest rates at the next meeting in February.
- The threat of US tariffs amid a row over Greenland adds uncertainty to UK inflation forecasts, economists say.
Current Inflation Trends
Having risen to a 2025 peak in July last year, inflation began a downward trajectory in the final quarter of the year, falling from 3.6% in October to 3.2% in November. Morningstar international economist Grant Slade says, “We think UK price growth likely held steady in the final month of 2025, forecasting headline CPI inflation of 3.3% in the twelve months to December.”
Bank of England’s Monetary Policy
At its latest Monetary Policy Committee meeting in December, the Bank of England said that Autumn Budget changes, as well as some downward moves in sterling oil and gas futures, had led Bank staff to expect inflation to hit target again in the second quarter of 2026. After four interest rate cuts in 2025, the Bank of England retains its cautious approach to monetary policy decisions as it nears the “terminal” interest rate—the point at which rates are high enough to stymie inflationary risk but low enough to sufficiently stimulate economic growth.
Impact of Geopolitics on Inflation
The onset of a possible trade war between the US and the UK and European allies also adds uncertainty to inflation forecasts. In recent days, President Donald Trump said the US government would hit the UK and several European Union allies with tariff increases for opposing his plans to annex Greenland. Christian Schulz, chief economist at Allianz Global Investors, says, “EU retaliation would transform the trade conflict from a supply shock for the US and a demand shock for the rest of the world into a potentially large stagflationary shock for all parties. This would materially alter the policy calculus for central banks.”
UK Economy Outlook
Morningstar’s Slade expects UK domestic economics to have a major impact on inflation in 2026. “We expect price growth to slow further in 2026, in line with softening UK economic conditions. Indeed, this morning’s release of labor market data points to widening labor market slack which should engender disinflationary impulse in the economy,” he says. He adds that inflation is likely to revert close to the BoE’s 2% inflation target by the end of the year.
Conclusion
In conclusion, the UK inflation forecast for 2026 is expected to be modest, with a slight increase in the Consumer Prices Index. The Bank of England’s cautious approach to monetary policy and the impact of geopolitics on inflation are key factors to consider. As the UK economy slows down, inflation is likely to revert close to the BoE’s 2% inflation target by the end of the year.
