Persistent inflation rates surpassing 3% are forecasted to persist through the year 2025, and extend well into 2026.
In a recent article on Macro-Economic Modelling and Forecasting, Professor Huw Dixon and Melanie Schirmer have presented a comprehensive analysis of inflation in Great Britain.
The forecast suggests that under all three scenarios - medium, high, and very high - inflation will remain above 3% for the next 12 months. The "low" scenario assumes each month's new inflation to be equivalent to 1% per annum, while the "medium" scenario assumes 2%, and the "high" scenario assumes 3%. The "very high" scenario, however, predicts new inflation each month equivalent to 5% per annum.
In May 2025, the annual CPI inflation in the UK fell slightly from 3.5% in April to 3.4%. The new inflation for the month was 0.2%, according to the Office for National Statistics (ONS). It is worth noting that the ONS made a mistake with the April inflation figure, which should have been 3.4% instead of 3.5%.
Goods price inflation increased from 1.7% to 2.0%, while services inflation fell steeply from 5.4% to 4.7%. The NIESR trimmed mean inflation measure remained at 1.8%.
The forecast also suggests that inflation in June may remain unchanged at 3.4% or increase slightly to 3.6%, depending on the scenario. However, geopolitical tensions, particularly the Israeli-Iran conflict, could result in a significant supply side shock to inflation in the coming months. The attack by Israel on Iran marks the beginning of a conflict that could spread, with Iranian allies such as Russia and China potentially becoming involved, leading to potentially greater repercussions.
Year-on-year wage increases slightly decreased to 5.3% according to the latest ONS data (February to April 2025). Core inflation (CPI excluding food and energy) fell from 3.8% to 3.5% over the same period.
Despite the "low" scenario, inflation remains above 2% over the same period, indicating a persistent inflationary pressure in the UK economy. The forecast provides valuable insights for policymakers and businesses as they navigate the challenging economic landscape in the coming months.
