The UK economy is bracing for a challenging period ahead, as new forecasts from the Organisation for Economic Co-operation and Development (OECD) signal that Britain is on track to experience the highest inflation among G7 nations in 2025, coupled with sluggish growth. The OECD’s latest outlook, published on September 23, 2025, paints a sobering picture: UK inflation is projected to average 3.5% in 2025 and ease only slightly to 2.7% in 2026—both figures well above the Bank of England’s 2% target.
These projections come at a crucial time for Chancellor Rachel Reeves, who is preparing for the Autumn Budget scheduled for November 26, 2025. The government faces mounting pressure to address what some are calling a deepening cost of living crisis, with the specter of stagflation—simultaneous stagnation and inflation—looming over the economic landscape. The OECD’s warning has reignited debate over how best to restore stability and growth, as well as over the government’s fiscal strategy.
"These figures confirm that the British economy is stronger than forecast – it has been the fastest growing of any G7 economy in the first half of the year," Reeves stated, according to reports from Yahoo Finance and This is Money. "But I know there is more to do to build an economy that works for working people – and rewards working people. That is what I’m determined we deliver through our Plan for Change."
Despite the Chancellor’s optimism, the OECD’s numbers tell a more nuanced story. UK GDP growth is forecast at just 1.4% in 2025 and 1% in 2026, falling behind global GDP growth projections of 3.2% and 2.9% for those years, respectively. This places the UK in a precarious position: while not in outright recession, growth is expected to lag behind both the global average and key economic rivals.
The inflation outlook is even more concerning. The OECD highlighted that Britain’s price rises are driven in part by persistent food inflation and higher business costs. The report also notes that food inflation is expected to remain above 5% well into 2026, compounding the pressure on households already grappling with higher living costs. The UK’s 3.5% inflation forecast for 2025 stands out as the highest in the G7, with the US predicted at 2.7% and the eurozone even lower.
Headline inflation in the UK was 3.8% in August 2025, nearly double the Bank of England’s 2% target. The Bank’s Monetary Policy Committee (MPC) responded by holding interest rates steady at 4% at its September meeting, with seven members in favor and two advocating for a modest reduction to 3.75%. The OECD expects a gradual easing of UK policy rates in 2026, but for now, high borrowing costs persist—affecting mortgages, business loans, and household budgets alike.
The Bank of England’s chief economist, Huw Pill, has recently expressed greater confidence in the UK’s path toward lower inflation, signaling a shift in his assessment of the risks. "It’s always a question of a balance of risks. I have been on the side of saying maybe the balance of risks are more on the inflationary side than the disinflationary side. I think, through time, and also as markets reprice, that probably is changing. Personally, I’m more comfortable now than I was six, nine, 12 months ago," Pill said during a recent event, as reported by Mortgage Introducer.
Still, the Bank remains cautious. Quantitative tightening (QT)—the process of reducing the central bank’s holdings of government bonds—continues apace. After peaking at £875 billion in gilts, the MPC recently voted to lower holdings by £70 billion over the next year, reducing the total to £488 billion. Pill, however, advocated for an even faster reduction of £100 billion, emphasizing the need for consistency in the central bank’s approach. "What permits QT to operate ‘in the background’ is the scope for bank rate (as the ‘active instrument’) to establish a policy stance that delivers inflation sustainably at target given the impact of QT on yields," he explained.
The policy choices facing the Bank of England are not without controversy. While some, including Pill, see reasons for cautious optimism, others warn that the UK is teetering on the edge of stagflation. Shadow Chancellor Sir Mel Stride was blunt in his assessment, stating, "The OECD confirms what hard-working families already feel – under Labour, Britain is in a high tax, high inflation, low growth doom loop. Rachel Reeves seems to think the solution is yet more tax rises. The UK is now teetering on the edge of stagflation, all driven by Labour’s economic mismanagement. This should be a wake-up call to the Chancellor: you can't tax your way to growth."
The data seem to support at least some of these concerns. The UK economy grew by just 0.2% in the three months to July 2025, a slowdown from 0.3% in June and 0.6% in May, according to the Office for National Statistics. Meanwhile, a closely-watched business survey—the purchasing managers’ index—pointed to a sharp slowdown in growth this September, with private sector output at its weakest level since May. Higher business costs have sparked subdued demand and further job cuts, underscoring the challenges ahead.
Market concerns over the UK’s inflation outlook and borrowing levels have also pushed up long-term gilt yields, with 30-year government bonds recently topping 5.5%. This has direct implications for government finances, as higher yields mean increased costs to service the national debt—at a time when the Chancellor is reportedly facing a £50 billion black hole in the public finances.
Despite these headwinds, some analysts believe the OECD’s outlook may be overly pessimistic. Martin Beck, chief economist at WPI Strategy, argued that "inflation and interest rates should both be lower next year, while the UK will also gain from spillovers from looser macroeconomic policy in the US and Europe. And with memories of the shocks of recent years fading and another round of damaging speculation about tax rises hopefully avoided, households may feel more confident about drawing on their savings." There is also evidence of consumer resilience, with UK retail sales reportedly outpacing global peers, offering a glimmer of hope amid the gloom.
Internationally, the UK’s economic challenges are mirrored by a broader slowdown. The OECD projects US GDP growth to fall from 2.8% in 2024 to 1.8% in 2025 and 1.5% in 2026, as higher tariffs and lower immigration take their toll. The euro area is expected to see growth of 1.2% in 2025 and 1% in 2026, while China’s growth is forecast at 4.9% in 2025 and 4.4% in 2026. The OECD warns that the full effects of US tariff increases have yet to be felt, with global trade and investment likely to face further headwinds in the coming months.
For now, the UK government and the Bank of England are walking a tightrope—balancing the need to tame inflation against the imperative to revive growth. With the Autumn Budget fast approaching and economic uncertainty running high, all eyes will be on Westminster to see whether policymakers can chart a course through the turbulence and restore confidence in Britain’s economic future.
