Inflation likely to remain at 3% throughout 2026

UK inflation is projected to remain steady at around 3%, but economists caution that the ongoing conflict in the Middle East could trigger a new squeeze on the cost of living in the coming months.

Official figures set to be released on Wednesday are expected to show the Consumer Prices Index (CPI) inflation holding steady at 3%, the same level recorded in January.

Some analysts predict a slight decline to between 2.8% and 2.9%. Decreases in fuel costs and a slowdown in service inflation are believed to counterbalance increases in clothing prices and airfares.

However, the outlook has dramatically worsened as energy prices have surged. The Bank of England has already indicated that rising wholesale gas costs will delay the return to its 2% inflation target, now expecting inflation to remain around 3% through mid-2026, a revision from earlier forecasts.

Economists are noting that the situation is becoming increasingly unpredictable. Sanjay Raja remarked that the outlook is “rarely been more uncertain,” with projections needing to be updated as conflict drives volatility in oil and gas markets.

Sanjay Raja, Deutsche Bank’s chief UK economist, wrote in a research note: “We expect the UK’s disinflation story will take another twist on its (eventual) way down to target.

“The good news is that CPI is still expected to slide down in the coming months.

“The bad news? Higher energy prices appear poised to lift CPI meaningfully over summer, adding yet another hump in the inflation profile.”

Some analysts now fear that inflation could exceed 4% later this year if elevated fuel prices persist. Edward Allenby warned that a sharp increase in petrol costs, along with a potential 19% rise in the energy price cap, could put additional pressure on households.

Allenby said: “Under our updated assumptions, we now anticipate a much sharper rise in petrol prices, while higher wholesale gas prices cause a 19% increase in the Ofgem energy price cap in July.”

With markets on edge, policymakers believe the next few weeks will be crucial in determining whether the UK will face a renewed inflation shock, just as it appeared that price rises were beginning to ease.