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The UK is especially exposed provided its reliance on gas for electricity prices, which is why the International Monetary Fund (IMF) has actually modified its UK inflation and development forecasts more sharply than any other industrialized economy. Inflation briefly dipped listed below 3% for the very first time because early 2025, but the reprieve will be short-lived.

ANSR July UK PRs

A weaker labour market and softer demand ought to avoid a repeat of 2022's double-digit spike, restricting second-round results. Our base case is inflation averaging 3.1% in 2026, peaking around 3.5%, before reducing to 2.5% in 2027, though risks loom big if the Strait of Hormuz stays closed. The UK labour market was already softening before the most recent energy shock, with unemployment rising to 5.0% and jobs at their lowest since the pandemic.

Companies are not yet shedding staff, but hesitation to work with is widening the space in between task development and population development. Greater energy costs will compound the pressure, and we expect unemployment to peak at 5.3% by year end. With wage growth slowing to around 3.75% and inflation heading towards 3.5%, genuine pay looks set to be stagnant another difficult year for living standards.

ANSR July UK PRs

Three aspects limit the case for hikes: the energy shock is smaller than in 2022, rates are currently at a restrictive level, and a weaker economy reduces the danger of second-round inflation results. That said, rate increases can not be eliminated if energy prices surge further. Gilt yields are likely to remain raised regardless, driven by the UK's inflation level of sensitivity and political unpredictability around a potential change of Prime Minister, keeping borrowing expenses high across the economy even if the policy rate remain on hold.