What's Happening?
Oxford Economics forecasts that core inflation in the UK will settle slightly above 2% through the latter half of 2026 and into 2027. This prediction is based on the anticipated reversal of temporary factors currently suppressing inflation, such as the removal
of energy levies and a freeze on rail fares. Additionally, an increase in fuel duty is expected to contribute to the inflationary trend. Despite a drop in inflation, slower nominal wage growth and higher taxes are projected to limit real earnings growth. The consultancy also notes that robust wage growth is likely to prevent services inflation from aligning with the Bank of England's 2% target.
Why It's Important?
The forecast by Oxford Economics suggests that the UK may face challenges in maintaining inflation at target levels, which could have significant implications for monetary policy. Persistent inflationary pressures might limit the Bank of England's ability to implement rate cuts, affecting mortgage pricing and broader economic conditions. The expected rise in core inflation could also impact consumer purchasing power and disposable income, as higher taxes and slower wage growth weigh on real earnings. This scenario underscores the complexity of balancing economic growth with inflation control, particularly in the context of ongoing wage pressures.
What's Next?
As inflationary pressures are expected to rise, the Bank of England may need to reassess its monetary policy strategy. The potential for only modest rate cuts this year could keep pressure on mortgage rates and borrowing costs. Policymakers will likely monitor wage growth and inflation trends closely to determine appropriate interventions. Businesses and consumers may need to prepare for a period of economic adjustment as temporary measures unwind and inflationary pressures persist.
