Persistent inflation to surpass 3% throughout 2025, extending into 2026.
In a recent article authored by Professor Huw Dixon, the forecast for inflation in the UK for the remainder of 2025 and beyond has been outlined. The forecast suggests that inflation is more likely to be in the "high to medium" range, with possible impacts on inflation in June.
According to the data, services inflation fell from 5.4% to 4.7%, while goods price inflation rose from 1.7% to 2.0%. However, the inflation rate between April and May 2025 was only 0.2%, a decrease from the 0.3% seen in the same months in 2024.
The graph in figure 1 shows the contributions of different sectors to overall inflation. The old inflation (April-May 2024) is represented in blue, while the new monthly inflation (April-May 2025) is shown in brown. The brown and the blue reinforced each other for Transport, giving a large dampening effect on headline inflation. In fact, the changes in headline inflation between April and May were mostly contributed by Transport (-0.35 percentage points).
In the new inflation (April-May 2025), there were nine positive contributions and only two negatives. The "low" scenario for future inflation assumes 1% per annum (0.08% per calendar month), the "medium" scenario assumes 2% per annum or 0.17% per calendar month, and the "high" scenario assumes 3% per annum (0.25% per calendar month). The "very high" scenario assumes 5% per annum (0.4% per calendar month), reflecting the inflationary experience of the UK in 1988-1992.
It's worth noting that the ONS made an error in the April inflation rate, which should have been 3.4% instead of 3.5%. Despite this, inflationary pressures are widespread throughout the economy, as positive "new" inflation was observed across most sectors.
The latest ONS data on wages (February to April 2025) shows year-on-year increases fell slightly to 5.3%. The NIESR trimmed mean inflation measure remained at 1.8%.
Looking ahead, the Ifo Institute forecasted a rise in inflation over the next 12 months in 2025, expecting inflation to slightly decrease to 2.1% by 2026 but rise again to 2.6% in 2027. The overall effect is the sum of the two and is shown as the burgundy line in figure 1.
As we move forward, it's crucial to monitor these trends closely and adjust economic policies accordingly to maintain a stable and healthy economy.
