UK inflation forecast to be highest in advanced economies in 2024 and 2025
The UK is set to have the highest inflation among the world's G7 advanced economies in 2024 and 2025, despite a slower rise in living costs, according to new forecasts.
The Organisation for Economic Co-operation and Development (OECD) has revised down its predictions for UK inflation to average 2.8% in 2024 and 2.4% in 2025. This would still make the UK the G7 country with the highest level of inflation in both years.
In 2024, the UK's inflation is predicted to be higher than Canada, France, Germany, Italy, Japan, and the United States. The OECD also warned about global inflation risks due to geopolitical tensions and disruption to Red Sea shipping.
The OECD has also lowered its UK growth forecast for 2023 to 0.3%, but it expects Britain's gross domestic product (GDP) to expand by 0.7% in 2024 and 1.2% in 2025. It suggested that central banks could start to lower interest rates in 2024, earlier than previously predicted, but cautioned that monetary policy must be "prudent".
The organisation added that it is "too soon to be sure that underlying price pressures are fully contained". Mathias Cormann, the secretary-general of the OECD, has suggested that central banks could start to lower interest rates this year if inflation continues to ease.
Shop prices 'are yet to peak and will remain high' as inflation hits new heights
He said: "Monetary policy needs to remain prudent, though central banks could start to lower interest rates this year, provided that inflation continues to ease." The OECD has raised concerns about the Israel-Gaza conflict and attacks on ships in the Red Sea by Houthi rebels.
The organisation stated: "High geopolitical tensions are a significant near-term risk to activity and inflation, particularly if the conflict in the Middle East were to disrupt energy markets." It also warned that an escalation of the conflict could disrupt shipping more extensively than currently expected, intensify supply bottlenecks, and push up energy prices.
The statement read: "A widening or escalation of the conflict could disrupt shipping more extensively than presently expected, intensify supply bottlenecks, and push up energy prices if traffic is interrupted in the key routes for the transport of oil and gas from the Middle East to Asia, Europe and the Americas,"
Last week, the Bank of England also expressed concerns over the Red Sea attacks affecting the outlook for inflation, but noted that the impact on the UK has been small so far. On Thursday, the Bank kept interest rates at 5.25% and hinted it could start thinking about cutting borrowing costs this year. However, it stressed that the job of reining in inflation is not done.
In its latest report, the OECD advised that global central bank policies "should remain restrictive for some time to come", suggesting that policymakers should not cut rates too quickly or too far. The UK's growth forecasts are looking rather gloomy, with the country predicted to have the joint third weakest expansion of the G7 countries, falling far short of the 2.1% pencilled in for the US.
Germany is set for the weakest expansion in the G7 this year, at just 0.3%, followed by France at 0.6% and then both the UK and Italy at 0.7%, according to the OECD.
* An AI tool was used to add an extra layer to the editing process for this story. You can report any errors to [email protected]
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