UK facing highest inflation in G7 in yet another pre-Budget blow for Reeves

Rachel Reeves has received yet another major blow in the run up to her make-or-break Budget next month after the International Monetary Fund (IMF) warned UK inflation is set to surge to the highest in the G7 in 2025 and 2026.

The beleaguered chancellor has already struggled to foster the economic growth she promised when Labour was elected last year and the latest outlook report suggests UK households are expected to face the highest rate of price inflation among the G7 group of advanced economies, driven in part by rising food and hospitality prices.

The influential economic body said price inflation in the UK would increase more sharply than expected in both years compared with previous predictions from July. It expects UK inflation to average at 3.4 per cent in 2025, increasing from its previous prediction of 3.2 per cent.

The forecasts also showed that UK inflation is expected to slow slightly to 2.5 per cent next year, but this is nonetheless above the 2.3 per cent prediction from earlier this year.

But it also came as the IMF increased its UK growth forecast for this year but reduced its prediction for 2026 amid concerns over the labour market.

The IMF’s report, which has been described as “grim”, casts doubt on the Bank of England’s hopes of bringing interest rates back to the 2 per cent target rate in the near future.

It will also threaten to increase the size of a black hole in the public finances, already estimated to be between £30bn and £40bn, by adding pressure to increased pensions with the triple lock guarantee and public sector pay demands.

The IMF’s latest report comes hours after a group of leading economists describing Ms Reeves’ situation as “desperate”, with the UK running a structural deficit and a row within Labour over whether to impose wealth taxes or break the manifesto pledge to hike income tax, VAT or employee national insurance.

In the world economic outlook, which comes as leading politicians and central bank bosses gather in Washington DC, the body highlighted that inflation is picking up in the UK and US.

Most recent figures from the Office for National Statistics (ONS) showed that UK consumer price index (CPI) inflation struck 3.8 per cent in July and August, marking the highest levels since January 2024.

The uptick has been particularly linked to accelerating food and hospitality prices, with many firms and industry groups claiming this has been partly driven by increased labour and tax costs.

Meanwhile, the UK economy is expected to grow by 1.3 per cent this year, after being boosted by strong growth in the first half.

It represents an improvement against the previous IMF forecast of 1.2 per cent.

However, the IMF has now cut its growth prediction for next year from 1.4 per cent to 1.3 per cent as global trade pressures threaten to impact on many economies.

Canada and France also saw their growth projections reduced amid pressure from tariff headwinds, while the US saw its forecast rise slightly.

Global growth for this year has also been upgraded from 3 per cent to 3.2 per cent in the report, with many economies proving to be more resilient than expected in the face of tariff pressures.

The IMF said growth early in the year surpassed expectations as spending was brought forward, while many economies have also benefited from smaller increases in US tariffs than originally announced.

"Households and businesses front-loaded their consumption and investment in anticipation of higher tariffs," the report said.

"This gave a temporary boost to global activity in early 2025."

Chancellor Rachel Reeves said: "This is the second consecutive upgrade to this year's growth forecast from the IMF.

"But know this is just the start. For too many people, our economy feels stuck.

"Working people feel it every day, experts talk about it, and I am going to deal with it."

Tory shadow chancellor, Sir Mel Stride said: "The IMF assessment makes for grim reading. Inflation in the UK is now set to be the highest in the G7 this year and next - rising faster than expected because of the choices Rachel Reeves has made.

"Since taking office, Labour have allowed the cost of living to rise, debt to balloon, and business confidence to collapse to record lows. Taxes are rising to record highs and families are being squeezed from all sides.

“Labour should be getting spending under control to bring down borrowing and avoid damaging tax rises, but Starmer and Reeves are simply too weak to do it.”

But Ms Reeves seized the improved growth estimates to inject a note of optimism ionto the forecasts.

She said: “This is the second consecutive upgrade to this year's growth forecast from the IMF. It’s no surprise, Britain led the G7 in growth in the first half of this year, and average disposable income is up £800 since the election.

“But know this is just the start. For too many people, our economy feels stuck. Working people feel it every day, experts talk about it, and I am going to deal with it. Working together, we can deliver a Britain built for all.”