Britain’s economy stuck between inflation and stagnation

In its new World Economic Outlook, the IMF forecasts that inflation in the UK will average 3.4% in 2025 and 2.5% in 2026 — the highest figures among the G7 economies. The projections mark a slight increase from the IMF’s previous report three months ago, reflecting ongoing inflationary pressures in the British economy.

While official UK inflation reached 3.8% in August and the Bank of England expects it to climb to 4% by year’s end, the IMF has warned of the risks of premature monetary easing. According to the Fund, cutting interest rates too soon could send the wrong signal to the public and markets — implying that inflation is no longer a threat — which could encourage households and firms to raise spending and prices further, locking in inflationary momentum.

However, maintaining high interest rates also carries heavy costs for households. About 30% of UK households have mortgages, and each renewal or rate adjustment increases their monthly payments. This has placed enormous financial strain on the middle class, reduced purchasing power, and even driven rents higher across the housing market. The Bank of England thus faces a policy dilemma: whether to cut or maintain rates, both choices bring serious economic and social trade-offs.

The IMF report also predicts that UK GDP growth will reach 1.3% in 2025, slightly better than earlier forecasts but still below the average for other advanced economies. Growth in 2026, however, is expected to slow further, with the Fund warning of “an uncertain outlook for domestic demand and limited investment.”

Mel Stride, the UK’s Shadow Chancellor, called the IMF’s assessment “deeply worrying,” saying:

“Since the Labour government took office, the cost of living has risen, debts have mounted, and business confidence has collapsed to its lowest level.”

He warned that the UK is “on the brink of stagflation” and that current government policies “fail to address the root causes of the crisis.”

Economists say the persistence of inflation in the UK stems from a combination of rising labor costs, weak productivity, and supply chain pressures. Higher minimum wages and employer national insurance contributions have increased production costs, which companies have passed on to consumers. Meanwhile, the service sector — the backbone of the British economy — is struggling with labor shortages and rising wages, driven in part by the country’s heavy reliance on migrant workers.