NIESR expects UK inflation to peak at 4.4% in February and stay above target until late 2030

UK inflation is expected to climb to 4.4% in February 2027 and not return to the Bank of England's 2% target until late 2030, according to the autumn forecast from the National Institute of Economic and Social Research (NIESR), published on Wednesday.

In July the think tank had forecast a peak of 3.8%. It now forecasts an average of 3.9% across 2027 and 3.0% in 2028, and puts the return to target around two years later than both the Office for Budget Responsibility and the Bank expect. CPI inflation was 3.5% in September.

NIESR links the higher peak to energy, with the price cap expected to rise by a further 16% or more in January. It notes that gas prices, which matter more for UK inflation than oil, have more than tripled since February.

Why NIESR thinks it will last

NIESR thinks second-round effects are now much more likely. Around three-quarters of 2027 pay awards will be settled in the early months of next year, just as NIESR expects inflation to be at its highest. Households expect prices to rise by 4.2% over the coming year, firms expect to raise their own prices by about 4%, and around 90% of private-sector employees work in industries where median pay growth is above 4%.

The jobs market has not loosened as NIESR expected. Unemployment has fallen to 4.7% this year, below the 5% the institute estimates as its natural rate.

Rates

The Bank raised Bank Rate from 3.75% to 4% on 5 November, its first increase since August 2023.

NIESR's central forecast assumes one more quarter-point rise, to a peak of 4.25% next year, but the institute said that would not be enough. Markets currently price Bank Rate at around 4.75% next year. On that path, NIESR estimates, inflation would be back at target in early 2029, about 18 months sooner than in its central case, at a cost of around 0.4 percentage points off GDP growth in both 2028 and 2029.

Growth and borrowing

The economy has done better this year than NIESR expected. It has raised its 2026 growth forecast to 1.6% from 1.1%, helped by government spending and business investment in energy and ICT. It forecasts growth slowing to 1.1% in 2027 and 0.9% in 2028.

The ten-year gilt yield hit 5.5% on 8 October, its highest since 2000, and NIESR estimates each percentage point on gilt yields adds about £10 billion a year to debt interest by the end of the decade, on top of the £124 billion projected for this year. After the 28 October Budget, headroom against the fiscal rules stood at £14.5 billion, down from £23.6 billion in March. If the deficit reduction plan slips as past plans have, NIESR estimates the rules would be missed by around £30 billion.

NIESR sees the risks to inflation as weighted to the upside. If oil stays around $100 a barrel, it estimates GDP would be up to 0.6% lower by the third quarter of 2028.

The next official inflation figures, for October, are due from the Office for National Statistics at 7am on Wednesday 18 November.