UK Set to Top G7 Inflation Charts in 2025 as IMF Warns of Persistent Price Pressures and High Borrowing Costs

Britain is poised to record the highest inflation rate among major world economies this year, according to the International Monetary Fund’s latest annual economic outlook. The IMF’s report puts the average rate for UK consumer prices at 3.4 per cent for 2025, a notable rise from 2.5 per cent the previous year and significantly above the Bank of England’s long-standing 2 per cent target. In contrast, Germany’s inflation is projected at 2.1 per cent, France at 1.1 per cent and the United States at 2.7 per cent, with the US figure pushed up in part by new tariffs.

The IMF’s chief economist Pierre Olivier-Gourinchas highlighted increased labour costs due to higher payroll taxes and shifting inflation expectations as primary risks for stubbornly high UK inflation. There are signs both households and businesses are losing confidence that inflation will drop as anticipated. The Bank of England has been urged to tread carefully regarding any relaxation of monetary policy in this environment.

A temporary surge in regulated prices for essentials such as water and energy is expected to ease in the following year, with the IMF forecasting UK consumer price inflation to drop to 2.5 per cent in 2026. The fund’s analysts anticipate that loosening employment markets and moderating wage growth will help bring inflation back to target by the end of that year.

On the growth front, the IMF upgraded its UK GDP projection by 0.1 point to 1.3 per cent this year, now anticipating the second fastest growth rate among G7 nations. Despite this, the medium-term outlook has dimmed by 0.4 points compared to last autumn’s assessment prior to Rachel Reeves’ chancellorship and the election of President Trump in the US.

The Chancellor pointed to an £800 rise in average disposable incomes since the last general election as proof of progress, expressing determination to address wider economic challenges. Recent labour market data shows a national unemployment rate of 4.8 per cent alongside cooling wage growth, indicating headwinds remain for working households.

Concerns persist over the cost of government borrowing, which is at its highest level in years. British long-term government bond yields now outstrip those in the US, Japan and the eurozone, driven by persistent inflation, high interest rates and unresolved fiscal issues. Despite a new partial trade tariff agreement with the US, British exporters face effective tariff rates rising to 10 per cent on certain goods. The IMF has cautioned that reliance on ad hoc bilateral deals could lead to further global trade instability and retaliation.