Shoppers face a fresh inflation warning as the conflict in the Middle East threatens to push food and energy prices higher than previously expected.
The International Monetary Fund (IMF) has raised its forecasts for UK inflation this year and next, warning that a prolonged conflict could keep prices elevated while putting pressure on economic growth.
Prime Minister Andy Burnham is also facing a weaker outlook for the economy next year, with the influential global body downgrading its growth forecast for 2027.
The IMF warned that a prolonged stalemate or further escalation in the Middle East could “keep energy and food prices elevated and volatile”, weigh on economic growth and worsen the fiscal position of governments.
It also cautioned that the impact could be compounded by extreme weather, cyber attacks and assaults on energy infrastructure.
UK inflation forecast raised for 2026 and 2027
The IMF's latest World Economic Outlook predicts that UK consumer prices will rise by 3.3% in 2026, up from its previous forecast of 3.2%.
That would leave Britain with the joint second-highest inflation rate among the G7 group of major advanced economies.
Inflation is expected to ease to 2.8% in 2027, but that is still considerably higher than the 2.4% rate previously forecast by the IMF.
The warning comes as households continue to grapple with the cost of living, with higher energy bills expected to put further pressure on family finances.
The latest figures from the Office for National Statistics (ONS) showed inflation rising to 3.1% in August, with price pressures expected to increase further over the coming months.
The Bank of England has warned that inflation could climb to “slightly above 4%” in the first quarter of 2027, partly because of another rise in the household energy price cap in January.
However, inflation is then expected to fall back over the course of next year.
The IMF also expects underlying, or core, UK inflation to return to target levels by the end of this year, later than it had previously anticipated.
Andy Burnham faces slower economic growth next year
The IMF offered a brighter assessment of Britain's economy for 2026, upgrading its growth forecast from 1% to 1.3%.
But the outlook for next year has weakened, with UK gross domestic product (GDP) now expected to grow by 1.2% in 2027, down from the previous forecast of 1.3%.
The report suggested that the boost from the adoption of artificial intelligence technology has helped support economies around the world this year.
UK grocery price inflation is making food shopping more expensive (Image: PA Wire)
However, rising prices and further disruption caused by the conflict in the Middle East are expected to weigh on economic activity.
The IMF also indicated that the shock to Britain's labour market has been less severe than previously expected.
UK unemployment is now forecast to reach 5.3% this year, compared with an earlier prediction of 5.6%.
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Global inflation set to rise as energy supplies come under pressure
The IMF expects global inflation to reach 4.7% in 2026 before easing to 4.1% in 2027.
Both forecasts are higher than previously anticipated, with the outlook for next year revised upwards by 0.2 percentage points.
The report was published alongside the annual meetings of the IMF and World Bank in Bangkok, as policymakers assess the economic consequences of the conflict and the risks facing the global economy.
For households, the warning means the prospect of falling inflation remains uncertain, with energy and food prices vulnerable to further disruption.
Although inflation measures how quickly prices are rising rather than whether prices are falling, a higher-than-expected rate would mean household budgets could remain under pressure for longer.