The UK is forecast to see the highest rate of inflation of the world’s seven richest nations this year, according to an influential global policy group.
The Organization for Economic Co-operation and Development (OECD) raised its forecast for UK inflation – the rate at which prices rise – to 3.5% across 2025, the highest in the G7.
It increased its forecast for UK growth slightly this year to 1.4%, but the economy is still expected to slow next year.
The forecast comes as Chancellor Rachel Reeves is preparing November’s Budget in which she is expected to put up taxes or cut spending in order to stick to her own rules on government borrowing.
The OECD’s UK inflation forecast for 2025 is higher than its previous estimate of 3.1%, and while the rate is forecast to fall to 2.7% in 2026, that would still be the second highest in the G7.
Growth in the UK is predicted to slow to 1% next year, unchanged from the OECD’s previous forecast in June.
It said this slowdown would be caused by a “tighter fiscal stance” – indicating either higher taxes or lower government spending – as well as increased trade costs and uncertainty.
Responding to the OECD’s forecast, Reeves said the figures “confirm that the British economy is stronger than forecast – it has been the fastest growing of any G7 economy in the first half of the year”.
“But I know there is more to do to build an economy that works for working people – and rewards working people. That is what I’m determined we deliver through our Plan for Change.”
Shadow chancellor Sir Mel Stride said the OECD confirmed “what hard-working families already feel – under Labour, Britain is in a high tax, high inflation, low growth doom loop”.
“Rachel Reeves seems to think the solution is yet more tax rises. The UK is now teetering on the edge of stagflation, all driven by Labour’s economic mismanagement.”
The latest monthly UK inflation figures showed the rate stood at 3.8% in August, driven by rising food prices, and the OECD said the UK was one of several countries being hit by higher food costs.
However, many UK companies have complained about higher costs from the increase in employers’ National Insurance Contributions and a higher minimum wage.
Analysts say these higher costs have been passed on to consumers, which has pushed up the UK’s inflation rate.
The current rate is well above the Bank of England’s target of 2%, and the Bank has predicted it will hit 4% before falling back.
Last week, the Bank kept interest rates unchanged and warned the UK was not “out of the woods yet” when it came to inflation.
The OECD raised its forecast for growth in the global economy for 2025 saying it was more resilient than expected in the first half of the year.
It now expects growth of 3.2%, up from the 2.9% it had predicted in June, partly due to “front loading” of activity as firms sought to complete deals before new US tariffs kicked in.
In the US, growth has been helped by strong investment in tech areas such as artificial intelligence (AI), and the OECD has increased its growth forecast for the US this year to 1.8% from 1.6%.
However, the OECD warned growth would “soften noticeably” in the second half of the year as the impact of higher tariffs is felt.
Tariffs are taxes on imported goods and Trump has imposed such levies on products arriving on American shores from various countries.
The OECD said US tariff rates had increased on almost all countries since May, with the overall effective rate hitting 19.5% at the end of August, the highest since 1933.
Trump has argued the import taxes will boost US manufacturing and jobs, but several economists have warned it will push up prices for US consumers.
The OECD said the full impact of the tariffs has yet to be seen. Some changes are being phased in over time, it said, while some companies are accepting smaller profit margins for now.
However, it said the impact was “becoming increasingly visible in spending choices, labour markets and consumer prices”.
“Growth is expected to soften noticeably in the second half of this year, as front-loading activity unwinds and higher effective tariff rates on imports to the United States and China dampen investment and trade growth,” it said.
