UK inflation to peak at 4.4% around start of 2027, FT survey shows

A Financial Times survey of 12 economists puts UK inflation's expected peak at 4.4% around early 2027, above the OBR's 3.8% projection; five economists forecast a peak of 4.5%–5%. The Bank of England is widely expected to raise its key rate by 25 basis points, while economists most commonly forecast a 4.25% peak; traders are pricing four quarter-point increases by the end of next year. Ofgem's energy price cap is on track to rise by more than 25% in January, lifting a typical household's annual bill by nearly £470 to about £2,200, according to EDF Energy estimates.

Analysis

The market risk is not simply a higher policy rate: an energy-led inflation pulse can lift near-term inflation compensation while weakening real household demand, leaving the Bank of England with a stagflation trade-off. If officials validate persistent second-round effects, front-end SONIA pricing and short-dated gilt yields can rise; if they stress the demand hit or look through temporary energy costs, the four-hike path priced by traders is vulnerable to repricing. Sterling is not a clean beneficiary of higher rates: a worse energy import bill and weaker consumption could offset the yield advantage.

The clearest equity sensitivity is domestic demand. UK discretionary retailers and housebuilders face pressure from lower real incomes and mortgage affordability; higher yields also weigh on long-duration assets. Banks have mixed exposure: higher rates may help asset yields, but funding competition and household credit deterioration could offset that benefit. Energy suppliers’ share prices are not a direct hedge for household bills because pass-through, hedging, and regulation determine earnings.

Near term, the BoE’s forecast and communication matter more than this small economist survey. Over 1–3 months, oil and gas prices, the January price-cap reset, and wage/services inflation will determine whether inflation broadens. Over 6–18 months, sustained energy costs risk a deeper consumption slowdown. A diplomatic de-escalation and lower energy prices would unwind inflation-risk pricing; persistent wage growth or rising inflation expectations would falsify the disinflation case. The survey alone is not a sufficient directional signal.

Key Decisions for Investors

• Avoid adding outright front-end rate exposure before the BoE announcement. If the Bank emphasizes second-round inflation and does not push back on market pricing, consider a modest payer position in short-dated SONIA swaps; risk is a demand-focused or explicitly temporary-energy assessment that pulls expected hikes lower.
• Prefer relative-value caution over a large UK duration short: an energy-driven inflation shock can steepen inflation compensation even as growth concerns support longer-dated gilts. Reassess after the BoE forecast and the next wage/services inflation releases; a sustained rise in pay growth would strengthen the bearish gilt view.
• Keep UK domestic-consumer exposure underweight versus internationally diversified equities, especially housebuilders and discretionary retailers, until the energy-bill reset and household spending data are clearer. Reduce the underweight if energy prices retreat and real-income indicators stabilize; worsening arrears or consumer volumes would reinforce it.
• Do not treat sterling as a straightforward long on higher-rate expectations. A GBP long needs confirmation from both rate differentials and stable energy-import costs; renewed oil and gas strength alongside weaker activity would invalidate that setup.