Britain’s Inflation Forecast Just Shifted Again. Households and the Treasury Carry the Same Energy Shock

A new forecast published on 11 November puts UK inflation on a longer and more expensive path than many households, borrowers and ministers would prefer. The National Institute of Economic and Social Research now expects consumer-price inflation to peak at 4.4% in February 2027, up from its July estimate of 3.8%, and to remain above the Bank of England’s 2% target through 2029 before returning to target only in late 2030. The Bank’s November report, by contrast, projects inflation rising to around 5% in mid-2027 before easing, while the Office for Budget Responsibility’s central forecast places average CPI inflation at about 3.4% in 2027. These are different forecasts built on different assumptions, not three measurements of one settled future. The immediate indicators are already uncomfortable: September CPI was 3.5%, CPIH was 3.6%, and regular pay was growing by 3.7% in the latest ONS period. The question is who absorbs the next round of energy costs, higher rates and weaker real-income growth.

A forecast disagreement with real household consequences

The most important new information is not simply that NIESR raised a number. It changed the expected duration of the inflation problem. Its November outlook, reported by Reuters on 11 November, moves the expected peak from 3.8% to 4.4% and delays the return to the 2% target by roughly a year, to late 2030. The institute expects the economy to grow by 1.6% in 2026, an improvement on its previous 1.1% estimate, but then slow to 1.1% in 2027 and 0.9% in 2028. It also projects unemployment rising from 4.8% in 2026 towards 5.1% in 2031. The combination is not a conventional boom in which households can easily absorb higher prices through stronger wages. It is a forecast of modest activity alongside a persistent cost shock.

The Bank of England’s November Monetary Policy Report gives a different central path. It records CPI inflation of 3.5% in September and projects a rise to around 5% in the middle of 2027. The Bank expects the direct energy effect to be joined by indirect costs as firms renew contracts, pay for transport and absorb more expensive inputs. It sees the risk of second-round effects increasing, although it says the available data do not yet show a large wage-price spiral. NIESR places more weight on persistence in wage and price setting. The disagreement is therefore about how long the initial shock will continue to influence behaviour after the first jump in fuel and utility costs.

The OBR’s October forecast is another useful reference, but it should not be treated as a rival prediction of exactly the same thing. It estimated annual CPI inflation at around 3.4% in 2027, with a quarterly peak close to 3.8% early in the year, conditional on its assumptions about energy prices and policy. It also estimated that higher interest rates and gilt yields would raise debt-interest costs by an average of about £11 billion a year across the forecast period compared with its March forecast. The OBR’s fiscal baseline and NIESR’s inflation path are different analytical products. The point is that the public finances are exposed if the more persistent scenario proves closer to reality.

The starting point is already above target

The ONS reported that CPI rose 3.5% in the year to September 2026, up from 3.1% in August. CPIH, which includes owner-occupiers’ housing costs, rose 3.6%, up from 3.3%. Core CPIH reached 3.1%, while services inflation was 3.9%. Those figures matter because they show that the price problem is not confined to the petrol forecourt. Transport and motor fuels made the largest upward contribution to the monthly change, but services and other categories also matter to the persistence question.

The Bank’s report says household electricity and gas prices, together with motor fuel, account for a large share of the recent overshoot. Petrol and diesel prices were materially higher than before the latest Middle East conflict. Firms face the same pressure through freight, heating, production and imported materials. A restaurant may not buy crude oil directly, but it pays for deliveries, refrigeration, packaging, heating and staff travel. If these costs persist, the price shock can move through a wide range of services and goods. The Bank’s analysis is therefore focused on the difference between a one-off rise in the price level and a continuing sequence of increases.

Pay data provide a partial buffer, not a guarantee. ONS figures for June to August show regular annual earnings growth of 3.7%, with real regular pay growth of 0.6% when adjusted by CPIH. The labour-market bulletin records unemployment at 4.7%, vacancies at 691,000 and a fall of 111,000 in payrolled employees between August 2025 and August 2026. That is a mixed picture. Employees are still receiving nominal pay rises, but the margin above inflation is modest and the hiring market has weakened. If inflation accelerates while wage growth stays near current levels, real earnings growth can turn negative.

This is why the live UK CPI indicator (opens in a new tab) is useful as historical context, but not as a substitute for the current ONS release. The published indicator series ends in 2025. The latest movement must be read from the ONS September 2026 bulletin, and the two should not be silently merged into a continuous data series. The wider mechanism is Factrail’s inflationary pressure (opens in a new tab) driver: energy costs can push up headline inflation first, then feed into prices and wage expectations if the shock lasts long enough.

Why the forecasts diverge

A forecast is conditional, not a promise. The Bank’s November projection uses a market-implied path for interest rates and assumptions about the future path of energy prices. NIESR’s forecast gives more weight to persistent wage effects and expects inflation to remain above target for longer. The OBR uses its own assumptions about energy prices, fiscal policy, market rates and the economy’s productive capacity. A different path for oil, gas, shipping or the duration of the conflict can move each forecast materially.

The Bank’s report says it has so far seen limited evidence of second-round effects in wages, even though the risk has increased. Its Agents’ contacts and business survey evidence show expected pay growth moderating rather than accelerating sharply. NIESR’s more pessimistic path implies that this restraint may not be sufficient to prevent a longer period of above-target inflation. The distinction is important: NIESR is not reporting that a wage-price spiral has already happened. It is warning that a longer energy shock could make persistence more likely.

The labour market can either dampen or amplify that process. If vacancies fall, unemployment rises and workers have less bargaining power, wage growth may moderate. That can reduce the risk of a persistent wage-price cycle, but it also means households may have less ability to defend their living standards. If workers seek catch-up pay after real incomes have been squeezed, firms may face higher labour costs. Whether they absorb those costs in margins or pass them into prices depends on demand, competition and productivity. The same headline inflation number can therefore coexist with very different distributions of pain.

The Bank of England is the institution with the monetary-policy lever. Its Monetary Policy Committee raised Bank Rate to 4% on 5 November by eight votes to one. One member preferred a half-point rise to 4.25%. The committee’s task is not to lower global energy prices. It is to stop a temporary external shock becoming a persistent domestic inflation problem. That creates a difficult trade-off: higher rates can restrain demand and expectations, but they also increase mortgage costs, business finance costs and the state’s cost of issuing new debt. The Bank of England has the operational responsibility for that rate decision; the elected government does not set Bank Rate by ministerial instruction.

The Treasury’s fiscal room is part of the same story

The October OBR forecast shows why the inflation outlook cannot be separated from fiscal policy. Higher Bank Rate and gilt rates raise the government’s debt-interest bill. The OBR’s estimate of central government debt interest, net of the Asset Purchase Facility, rises from £108.7 billion in 2025–26 to £123.9 billion in 2026–27 and £134.0 billion in 2027–28. Those are forecast figures, not cash already spent. But they show the scale of the sensitivity. A sustained rise in market rates can crowd out money that ministers would otherwise allocate to services, investment or tax relief.

The OBR also estimates that a 1 percentage point change in interest rates could change government debt-interest costs by around £16 billion. That sensitivity makes the NIESR scenario relevant to the Treasury’s fiscal choices. If inflation persists and rates remain higher, the government may face pressure to raise revenue, restrain spending or accept a narrower margin against its fiscal rules. Chancellor Rachel Reeves (opens in a new tab) has to make those choices through budgets and spending decisions, not through the Bank’s independent rate-setting process. If the government responds with broad untargeted subsidies, it may protect household cash flow in the short term but increase borrowing or weaken the incentive to reduce energy consumption. If it does too little, the cost of the shock falls more heavily on households with low savings and high energy needs.

The October Budget measures are expected by the Bank to reduce CPI inflation by around a quarter of a percentage point in the second quarter of 2027, mainly through fuel-duty and electricity-bill measures. The effect is temporary and unwinds later. That does not make the measures pointless. It means the public should distinguish a reduction in the measured inflation rate from a lasting reduction in the underlying cost of energy. A temporary tax freeze can slow the rate of price increases without restoring the purchasing power already lost.

Who benefits and who pays

Households with fixed-rate mortgages that are due to reset, renters facing higher landlord financing costs, commuters dependent on cars and low-income families with high energy expenditure are exposed to the combination of prices and rates. Workers whose pay rises lag behind CPIH lose real purchasing power. Small businesses that cannot easily pass on higher input costs may absorb the shock in margins, reduce hours or postpone investment. The state pays through higher debt interest and may have less room to fund other priorities.

Some firms can benefit from higher nominal prices, especially producers and traders whose revenues rise faster than their costs. Energy producers may receive higher prices for output, while companies with strong pricing power may protect margins. Banks may benefit from some higher interest margins, although funding costs, credit losses and weaker demand complicate the picture. Those possible gains should not be confused with a general improvement in household welfare. A company’s nominal revenue can rise while its customers become poorer in real terms.

The household purchasing power (opens in a new tab) driver is the most direct welfare test. It should be measured through real disposable income, energy expenditure, food prices, housing costs and the share of income left after essentials. A national CPI figure alone cannot reveal which households are most exposed. A household in a poorly insulated rental home with no savings experiences the same headline inflation differently from a high-income household with a fixed mortgage and financial assets.

The counterargument to the pessimistic case is that the UK economy has been more resilient than some forecasters expected. NIESR itself raised its 2026 growth forecast to 1.6%. The ONS labour data do not show a collapse in employment, and the Bank says activity in recent months was stronger than expected. If energy prices fall faster than assumed, firms may absorb some costs and wage expectations may ease. In that case, the more pessimistic inflation path will not materialise. The right response is not to treat one forecast as certain, but to make policy robust to both outcomes.

Three scenarios and what would change the assessment

In a short-shock scenario, energy prices fall, wholesale costs ease and the direct contribution to CPI reverses. The Bank can hold rates steady or eventually reduce them as inflation expectations remain anchored. Households still face a higher price level, but the rate of further increases slows. The indicators to watch are wholesale gas and oil prices, the next ONS CPI release, business selling-price expectations and wage settlements.

In a persistent-shock scenario, energy costs remain high and begin to feed into transport, food, services and wage negotiations. NIESR’s longer path becomes more plausible. The Bank may keep rates restrictive for longer, and the Treasury’s debt-interest forecast may need another revision. Watch core CPI, services inflation, regular pay growth, vacancies and the OBR’s next estimate of debt interest.

In a stagflationary scenario, energy prices remain elevated while employment and output weaken. Households then face higher bills and less income security at the same time. Broad subsidies would be expensive and difficult to target. The policy test would be whether support protects vulnerable households without creating a new fiscal or inflationary problem. Watch unemployment, real household disposable income, energy arrears and the composition of government support.

The next formal inflation reading is due from the ONS on 18 November. The next Bank Rate decision is due on 17 December. Ofgem’s next price-cap announcement will show how much of the wholesale cost shock reaches household bills for the next tariff period. Those dates provide a practical sequence for testing the forecasts rather than debating them in the abstract.

The central conclusion is that Britain’s inflation problem is no longer just a question of the next monthly CPI print. It is a contest between the duration of the energy shock, the resilience of wages and firms, the Bank’s credibility and the Treasury’s ability to absorb higher borrowing costs. The people who benefit from nominal price increases are not automatically the people who benefit from economic resilience. The people who pay are identifiable in household bills, debt servicing and public budgets. The next data releases will show whether the latest NIESR warning is an outlier or an early signal that the cost of the shock is lasting longer than the official central case assumes.

Sources

• NIESR forecast reported by Reuters — UK inflation to overshoot Bank of England target for next four years, 11 November 2026 (opens in a new tab)
• Bank of England — Monetary Policy Report, November 2026 (opens in a new tab)
• Office for Budget Responsibility — Economic and Fiscal Outlook, October 2026 (opens in a new tab)
• ONS — Consumer price inflation, September 2026 (opens in a new tab)
• ONS — Labour market overview, October 2026 (opens in a new tab)
• ONS — Average weekly earnings, October 2026 (opens in a new tab)
• Ofgem — Energy price cap timetable, October–December 2026 (opens in a new tab)