UK inflation forecast: where are prices heading next?

Inflation fell to 3% in the year to January 2026, mostly in line with analyst expectations, as price growth in the UK appeared to continue its downward trend.

It followed an uptick in the year to December 2025, when CPI inflation rose to 3.4%, according to the Office for National Statistics (ONS).

The sharp January dip was mostly caused by disinflationary pressures in transport, food and non-alcoholic beverages, and housing and household services.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Consumers in the UK will breathe a sigh of relief after January’s data showed inflation fell after a worrying rise in December – but war in the Middle East now threatens the UK economy.

On 28 February, conflict broke out after the US and Israel ordered strikes on Iran. The war has led to the effective closure of the Strait of Hormuz, a narrow shipping lane through which 20% of the world's oil previously passed.

The war has already caused a major disruption to global markets. In the aftermath of the first strikes, the price of oil rose sharply. It peaked at over $118 for a barrel of Brent Crude before stabilising at around the $100 mark. Before the war started, oil was trading at around $65 a barrel.

At the same time, UK gilt yields soared, heavily increasing the price of government borrowing.

Now, economists are warning that the conflict may mean inflation will rise again in the UK, as the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, said the economy could face a “very significant” hit.

We look at where inflation may be going next, why a conflict so far away could increase prices in Britain, and what price growth could mean for interest rates.

When will inflation come down?

At the start of 2025, inflation fell close to the Bank of England’s 2% target but quickly rose to a high of 3.8% by July. Inflation stayed at this level between July and September, then fell in October and November.

But this trend of either plateauing or falling inflation was bucked in the final month of 2025, when December’s data showed price growth rose to 3.4%.

When it was released, January’s data seemed to support the case being made by many economists that inflation was going to sustainably fall through 2026, reaching the 2% target this year.

Before the conflict emerged, almost all economists agreed that inflation would continue on an overall downward trend, with every economist surveyed by the Treasury between 2 and 12 February echoing this view. The average inflation prediction among them for Q4 2026 was 2.2%.

Analysis by the Bank of England (BoE) also suggested that inflation would fall to 2.1% in the second quarter of 2026.

Economic forecasts released alongside the chancellor’s Spring Statement on 3, the OBR estimated inflation to fall to 2.3% this year, lower than the 2.5% it predicted in November 2025.

However, all these forecasts were made under assumptions that may no longer be true, as the US-Iran war has the potential to seriously disrupt the UK economy.

The introduction to the OBR’s report said as much, highlighting that conflict in the Middle East, which emerged just days before the report was set to be published, could have “very significant impacts on the global and UK economies”.

What will the Iran war mean for UK inflation?

UK inflation is likely to be affected by the war in the Middle East, as prices could rise for some products exposed to the oil markets.

Fluctuations in the price of oil have a significant effect on inflation, as each $10 rise in the price of a barrel of oil typically translates into a 0.1 percentage point rise to CPI inflation.

The UK is particularly exposed to shocks from increased wholesale energy prices, which manifest themselves to consumers in the form of higher energy bills.

Energy consultancy Cornwall Insight said the energy price cap could rise by 10% in July if the conflict continues to wreak havoc on global energy supply lines.

The CPI basket of goods is particularly exposed to volatility in the energy market, analysis from Deutsche Bank shows. The bank says 27% of the CPI basket has “very high” exposure to the energy market volatility, 23% “high”, 19% “low” and 31% “very low.

With 50% of the CPI basket having an either “high” or “very high” exposure, rising energy prices could have an outsized impact on the next inflation reading.

Sanjay Raja, chief UK economist at Deutsche Bank, said the UK’s disinflationary track could be meaningfully disrupted if energy prices remain at current levels (or rally higher).

Brits may also be hit by increased petrol and diesel and heating oil prices after the conflict led to a sharp rise in the cost of a barrel of oil, which has a knock-on effect on the price of fuel.

The average price of a litre of petrol has reached an 18-month high after it surged by nearly 8p between Saturday 28 February, when the conflict started, and 13 March, said Simon Williams, head of policy at RAC.

Meanwhile, the average price of a litre of diesel has increased by almost 17p in the same time period.

What’s the link between inflation and interest rates?

Inflation above the 2% target is always a cause for concern for economists, policymakers and consumers.

The Bank of England is particularly focused on inflation, as it has a remit to guide and control inflation so prices do not spiral out of control.

This is largely done through influencing interest rates, which are typically raised to fight inflation.

Broadly speaking, the trade-off to fighting inflation with higher interest rates is reduced economic activity. When interest rates are high, people have to use more of their earnings on expenses like their mortgage and are incentivised to save their cash as savings rates tend to be higher.

However, despite inflation having been above target for all of 2025, the Bank of England has still gradually cut rates since the summer of 2024.

What does the inflation outlook mean for future interest rate cuts?

The Bank of England chose to hold interest rates at 3.75% at the most recent Monetary Policy Committee (MPC) meeting on 5 February.

The vote to hold was surprisingly close, passing by just one vote, as four of the nine members of the MPC wished to cut rates again. Most analysts expected the vote to be more united.

Before the most recent conflict in the Middle East, analysts expected the MPC to cut interest rates twice in 2026, with a 90% chance of a cut at the next MPC meeting on 19 March having been priced in by the markets.

However, the chances of this have dropped dramatically as the inflationary risk of the US-Iran war became clearer.

Most economists no longer expect a March rate cut, with some even thinking the MPC will hike rates.

Raja at Deutsche Bank said: “The MPC won't be rushed into a rate cut on 19 March. Geopolitical events have clouded the economic outlook. Barring an imminent resolution to the Iran shock, the effects on the economy will be meaningful, with GDP lower, unemployment higher, and inflation pushing well above the BoE's February projections.”

Whereas Deutsche Bank expected a March rate cut before the conflict, they now think this will be delayed to June. Unlike some forecasters, they are still expecting two rate cuts in 2026.