UK inflation could remain above the Bank of England’s 2% target until late 2030 unless interest rates rise further than currently anticipated, according to the National Institute of Economic and Social Research.
In its latest economic outlook, NIESR forecasts inflation reaching 4.4% in February 2027, compared with its previous prediction of 3.8%, as higher energy costs spread through prices and wage negotiations.
The institute expects inflation to average 3.9% during 2027 and 3% in 2028, with price growth remaining above target until the end of the decade.
Its forecasts follow the Bank of England’s decision on 5 November to increase Bank Rate from 3.75% to 4%, the first increase since August 2023.
The Monetary Policy Committee voted eight to one in favour of the quarter-point rise, with one member supporting a larger increase to 4.25%.
NIESR expects Bank Rate to rise once more, reaching 4.25% during 2027, but argues that such limited tightening would leave monetary policy too loose to contain the emerging inflationary pressures.
It contrasts that expectation with financial market pricing that anticipates rates reaching approximately 4.75% next year.
According to NIESR’s modelling, the higher rate path could return inflation to target in early 2029, approximately 18 months sooner than its central forecast.
That outcome would involve an economic cost, with UK GDP growth around 0.4 percentage points lower in both 2028 and 2029 than under the institute’s central projections.
Energy costs feed into wage negotiations —
Higher oil and gas prices have contributed to renewed inflationary pressure following the escalation of conflict in the Middle East earlier this year.
NIESR reports that gas prices have more than tripled since February, while oil remained above $100 a barrel during September and October.
The institute expects the domestic energy price cap to rise by at least another 16% in January, increasing pressure on household budgets and on businesses exposed to energy costs.
It also identifies a risk that sustained inflation will influence pay settlements and commercial pricing decisions.
Approximately three-quarters of annual pay awards for 2027 are expected to be negotiated around the period when inflation reaches its forecast peak. NIESR warns that higher inflation expectations could become embedded in wage and price setting.
Households surveyed expect inflation of around 4.2% over the following year, while businesses anticipate increasing their prices by approximately 4%.
The Bank of England’s own November forecasts expect inflation to reach around 5% in the middle of 2027 before declining as energy price pressures ease and restrictive monetary policy affects demand.
NIESR has nevertheless upgraded its forecast for economic growth during 2026 from 1.1% to 1.6%, citing stronger government spending and business investment, particularly in energy and information technology.
It subsequently expects growth to slow to 1.1% in 2027 and 0.9% in 2028.
Sachin Agrawal, managing director of Zoho UK, said persistent inflation and the possibility of elevated interest rates were adding pressure as companies prepared their budgets for the coming year.
He said: “That makes confidence and clarity all the more important and businesses will want to see a credible path back to stable prices.”
NIESR also questions the credibility of the government’s deficit reduction plans, warning that postponed spending decisions could leave a substantial gap in the public finances.
The institute’s central inflation forecast remains significantly more persistent than the outlooks published by the Bank of England and the Office for Budget Responsibility, reflecting its assessment of how higher energy costs will affect wages and prices.
