UK to suffer highest inflation in G7 this year, says OECD

The OECD forecasts the UK will experience the highest inflation among G7 nations, averaging 3.5% in 2025 and 2.7% in 2026 (above the BoE target), while its GDP growth is projected to slow to 1% in 2026 due to tight fiscal policy. Globally, the OECD upgraded 2025 GDP growth to 3.2% but anticipates a deceleration to 2.9% in 2026, primarily driven by the delayed impact of increased US tariffs (averaging 19.5%) and slowing labor markets, with significant risks including further trade protectionism, resurgent inflation, and financial market repricing.

Analysis

The Organisation for Economic Co-operation and Development (OECD) projects a challenging macroeconomic environment for the United Kingdom, forecasting it will have the highest inflation among G7 nations in 2025 at 3.5%. This persistent inflation, expected to remain above the Bank of England's 2% target at 2.7% in 2026, is attributed to resurgent food prices and government policy, including increased national insurance contributions. Concurrently, the UK's economic growth is set to decelerate, with a modest 1.4% GDP growth forecast for this year followed by a sluggish 1% in the next, a slowdown the OECD links directly to a "tighter fiscal stance" of higher taxes and reduced spending. On a global scale, the OECD has upgraded its 2025 global GDP growth forecast to 3.2%, citing unexpected resilience and trade front-loading ahead of US tariffs. However, this optimism is tempered by a projected slowdown to 2.9% in 2026 as the full impact of US tariffs, now averaging a multi-decade high of 19.5%, materializes and labor markets cool. The report explicitly warns of significant downside risks, including further protectionist measures, a resurgence of inflation, and potential financial market repricing.

Key Decisions for Investors

• Given the forecast for G7-leading inflation and fiscally-constrained growth in the UK, investors should adopt a cautious stance on UK domestic equities and sterling, as stagflationary pressures could limit the Bank of England's policy flexibility.
• The anticipated slowdown in global and US GDP for 2026, driven by the delayed impact of significant US tariffs, warrants a re-evaluation of exposure to cyclical sectors dependent on international trade, favoring a more defensive portfolio allocation.
• It is critical to monitor the UK's November budget, as the expected tax hikes and tighter fiscal policy are the primary drivers behind the weak 1% growth forecast for 2026, directly impacting the outlook for UK-domiciled assets.
• In light of the OECD's explicit warnings on risks from further tariffs and financial market repricing, it is prudent to review portfolio hedges and stress-test for scenarios involving escalating trade conflicts and persistent global inflation.