UK inflation is expected to remain above the Bank of England’s 2% target until late 2030, according to the National Institute of Economic and Social Research (NIESR), as energy shocks linked to the Iran war feed into wage growth and prolong underlying price pressures. The institute raised its forecast inflation peak from 3.8% to 4.4% in February 2027, pushing back the expected return to target by another year. NIESR warned that second-round inflation effects could persist long after the initial energy disruption subsides, with wage growth projected to average 3.9% over the next three years. The outlook highlights the risk that elevated inflation becomes increasingly embedded in domestic costs rather than remaining confined to energy and other external shocks.
Despite the worsening inflation outlook, NIESR upgraded its 2026 GDP growth forecast from 1.1% to 1.6%, reflecting stronger government spending and business investment, partly supported by AI-related activity. However, this near-term resilience is not expected to last. Growth is projected to slow to 1.1% in 2027 and 0.9% in 2028, while unemployment is forecast to rise gradually from 4.8% in 2026 to a peak of 5.1% in 2031. NIESR Director David Aikman warned that the economy now faces the “double whammy of higher energy prices and rising global borrowing costs.” The combination suggests that stronger activity this year offers limited protection against the longer-term squeeze from persistent inflation and weaker growth.
The projections also underline a difficult monetary policy trade-off. NIESR expects the BoE to deliver just one additional interest rate hike in February 2027, compared with market expectations of two or three 25bps increases by the end of next year. Yet the institute estimates that borrowing costs would need to rise to around 5% to bring inflation back to target in the medium term, suggesting that its anticipated policy path would leave inflation elevated for longer. This tension reflects the challenge of restraining persistent price pressures without unnecessarily worsening the growth slowdown. With inflation expected to overshoot the BoE’s target for several more years, the central concern is no longer simply the immediate energy shock, but how deeply its effects become embedded in wages and domestic prices.
Key Takeaways
- NIESR expects UK inflation to peak at 4.4% in February 2027, up from its previous 3.8% forecast, with inflation remaining above the BoE’s 2% target until late 2030 as energy shocks feed into persistent wage pressures.
- UK growth is projected to improve to 1.6% in 2026, upgraded from 1.1%, before slowing to 1.1% in 2027 and 0.9% in 2028, highlighting the risk of prolonged inflation alongside weakening economic activity.
- NIESR forecasts just one additional BoE rate hike in February 2027, despite estimating that interest rates around 5% would be needed to return inflation to target in the medium term, underscoring the difficult trade-off between price stability and growth.
