Increase in Shop Prices Signals 17-Month High; Impact on Interest Rates Explored
The UK's inflation outlook has been revised following the recent budget announcement, with headline CPI inflation projected to be around 3.6% in mid-2025. This figure is expected to rise to about 3.7–4.0% in the second half of 2025, due to higher food and regulated prices, according to updated forecasts.
For 2025, inflation is expected to remain elevated around 3.6% to 3.9%, reflecting both energy and regulated price effects. In 2026, inflation is forecast to decrease significantly, trending to around 2.3% by the end of 2026, according to Trading Economics. The Bank of England forecasts show a gradual decline to about 2.7% in Q3 2026, moving closer to the 2% target by mid-2027.
The EY ITEM Club projects headline inflation falling back to about 2.6% in 2026 and reaching the 2% target in the latter half of 2026, driven by softer wage growth and looser labor market conditions.
The Bank of England's Monetary Policy Committee (MPC) acknowledges risks of upside inflation pressures but expects disinflation to resume after late 2025, supported by monetary tightening effects and fading external shocks.
November's figures showed a rise in shop prices, ending a 17-month run of falling prices. Fresh food prices, in particular, were 1.2% higher than last November, with items such as seafood and tea contributing to the increase. This rise in shop prices may signal the end of falling shop inflation, according to British Retail Consortium (BRC) chief executive Helen Dickinson.
The rise in shop prices could also contribute towards wage growth staying high, another driver of inflation. Additionally, the National Living Wage is set to rise by 6.7% from April, which could contribute to rising costs for some businesses.
The interest rate reduction at the Bank's next Monetary Policy Committee meeting in December looks unlikely, based on market expectations. In the latest poll from news agency Reuters, almost two-thirds of economists expect rates to be kept on hold at the meeting in December. No further information was provided about when interest rates might fall further.
Chancellor Rachel Reeves announced £70bn in spending policies to boost investment in the UK economy and prevent department cuts. However, these measures could potentially add to inflationary pressures in the future.
In summary, the updated inflation forecasts indicate that headline CPI inflation is projected to be around 3.6% in mid-2025, peaking near 3.7–4.0% in H2 2025, before starting a downward trend towards the 2% target during 2026 and reaching near 2% by mid-2027. These forecasts reflect recent economic data and ongoing policy adjustments from the Bank of England as of August 2025.
[1] Trading Economics (2025). UK Inflation Rate. [Online] Available at: https://tradingeconomics.com/united-kingdom/inflation-cpi
[2] Bank of England (2025). Inflation Report. [Online] Available at: https://www.bankofengland.co.uk/monetary-policy/inflation-report
[3] Office for Budget Responsibility (2025). Economic and fiscal outlook. [Online] Available at: https://obr.uk/economic-and-fiscal-outlook-march-2025/
[4] EY ITEM Club (2025). Spring Forecast 2025. [Online] Available at: https://www.ey.com/en_uk/economics/item-club/spring-forecast-2025
- In light of the revised inflation outlook, businesses might face challenges in managing their finances due to the anticipated increase in interest rates.
- The continued rise in inflation, especially in shop prices, may trigger a response from the Bank of England to adjust interest rates in the future, as a means to curb inflationary pressures.
