The UK is set to record the highest inflation rate among the world’s richest economies in 2025, according to the Organization for Economic Co-operation and Development (OECD). The group now expects inflation to average 3.5% next year, up from its previous estimate of 3.1%. The increase is largely driven by higher food costs.
While inflation is forecast to ease to 2.7% in 2026, the rate would still be the second highest across the G7.
Growth outlook slows
The OECD also nudged up its forecast for UK growth this year to 1.4%, but warned the economy is likely to slow to 1% in 2026. It cited tighter fiscal policy—meaning potential tax rises or lower public spending—along with higher trade costs and ongoing uncertainty.
The report comes ahead of Chancellor Rachel Reeves’s first Budget in November, where she is expected to announce tough choices on spending and taxation to meet borrowing rules.
Political reactions
Responding to the OECD’s outlook, Reeves said the figures show the economy is stronger than expected. “The British economy has been the fastest growing in the G7 in the first half of the year. But I know there is more to do to build an economy that works for working people,” she said.
Shadow chancellor Sir Mel Stride accused Labour of driving the UK into a “high tax, high inflation, low growth doom loop,” warning that the country risks sliding into stagflation.
Pressure over taxes
Speculation is mounting over possible tax rises in the Budget. Some analysts suggest Reeves may need to find £20bn–£30bn to stick to her fiscal rules. The Resolution Foundation has proposed shifting part of National Insurance into income tax, raising about £6bn, but Labour has pledged not to raise income tax, VAT, or National Insurance on working households.
Food costs and wages driving prices
The OECD highlighted food inflation as a key factor in the UK’s rising costs. Many businesses have also pointed to higher employer National Insurance contributions and increases in the minimum wage, which they say have fed into higher consumer prices.
UK inflation was 3.8% in August—almost double the Bank of England’s 2% target. The Bank has warned it could rise to 4% before easing and kept interest rates on hold last week, stressing the UK is “not out of the woods yet.”
Global economy and US tariffs
The OECD said the global economy is proving more resilient than expected and raised its 2025 growth forecast to 3.2%, up from 2.9%. The US outlook was lifted to 1.8% this year, driven by strong investment in artificial intelligence and other tech sectors.
However, it warned growth will “soften noticeably” in the second half of 2025 as new tariffs imposed by President Donald Trump take effect. US import tax rates now stand at their highest level since the 1930s, sparking concerns over higher costs for consumers worldwide.
