UK inflation forecast: what the predictions say for 2026 and beyond

UK CPI inflation is forecast to settle in the 2 to 3 percent range through 2026, according to the Bank of England's most recent Monetary Policy Report and the Office for Budget Responsibility's projections. That is a significant improvement from the 11.1 percent peak reached in October 2022, but the path back to the 2 percent target has been slower and less linear than the Bank initially projected. Services inflation and wage growth remain the main reasons the forecast is not more benign.

Where inflation stands now

CPI inflation fell from its October 2022 peak through 2023 and 2024 as energy prices normalised, global supply chains recovered, and the Bank of England's interest rate rises began to slow demand. The fall in goods inflation was faster than expected. Services inflation, which reflects domestic labour costs and price-setting behaviour rather than global commodity prices, has been stickier. As of early 2026, headline CPI is close to the Bank's 2 percent target, but services CPI remains elevated, keeping the Monetary Policy Committee cautious about the pace of rate cuts.

What the forecasts say for 2026

The Bank of England's February 2026 Monetary Policy Report projected CPI inflation averaging around 2.5 percent through 2026 before falling back towards 2 percent by mid-2027. The OBR's March 2026 forecast was broadly consistent, projecting inflation in the 2 to 3 percent range through the year. Both forecasts are conditioned on market-implied interest rate paths and assume no major new supply shocks.

The main upside risk to those forecasts is wage growth. Nominal wages have been running above 4 percent in annual terms. If wage growth remains at that level while productivity growth stays weak, services businesses will continue passing higher labour costs into prices, keeping services CPI above the level consistent with the overall 2 percent target. The Bank of England has been explicit that it is watching the services component and the wage data closely at each MPC meeting.

Interest rate projections and inflation

Inflation and interest rate forecasts are directly linked. The Bank of England's rate-cutting cycle, which began in August 2024, is itself conditional on inflation continuing to fall. If inflation proves stickier than forecast, the MPC will slow or pause rate cuts. If inflation falls faster than expected, cuts can accelerate. Market pricing as of May 2026 implies the base rate reaching around 3.5 to 3.75 percent by end-2027, which is consistent with inflation returning sustainably to target. For more on the rate trajectory, see our note on whether UK interest rates are going down.

The difference between CPI and RPI forecasts

Inflation forecasts are almost always expressed in CPI terms because that is the Bank of England's target measure. RPI forecasts, where they exist, run higher due to the methodology difference described in our note on RPI versus CPI. For most business planning and financial modelling purposes, CPI is the appropriate measure unless specific contracts or obligations are linked to RPI.

What the inflation outlook means for businesses

An inflation environment of 2 to 3 percent is broadly manageable for most businesses, but the composition matters as much as the headline. Services inflation above 4 percent means labour-intensive businesses continue to face pressure. Goods inflation close to zero means price increases on physical products are difficult to sustain. The divergence between sectors on pricing power is likely to persist through 2026.

For businesses with revenue or costs linked to inflation indices, particularly those with RPI-linked contracts, the spread between RPI and CPI remains meaningful. The CPIx tracks the consumer-level pressure that shapes the inflation outlook in real time. The Briefed daily briefing covers each ONS inflation release and Bank of England forecast, weekdays at 6:45am. Free to read.