OBR Cuts UK Growth Forecast to 1% as Inflation Forecast Rises

What changed

The Office for Budget Responsibility cut its UK growth forecast for next year from 1.6% to 1% and expects inflation to peak at 3.8% in 2027 as energy prices rise. Interest rates, currently 3.75%, could reach 4.5% in the coming years, while petrol averages almost £1.73 a litre and diesel is near £1.99.

Why it matters

This is a squeeze from both directions. Higher fuel costs feed into transport and supply chains, pushing up prices well beyond the forecourt. Higher interest rates then make mortgages and other borrowing more expensive, while increasing the government’s debt-interest bill.

Households are likely to feel the pressure unevenly. Lower-income households spend a larger share of their budgets on energy, leaving less money for everything else. Real disposable income is expected to grow from 2027, but by less than previously forecast.

The government has announced cost-of-living support, but economists have judged the measures small beside the expected winter inflation surge. The Bank of England is widely expected to raise rates next week, though that decision and the longer-term path for energy prices remain prospective.

The broader outlook is grim: inflation is forecast to average 3.4% next year before moving towards the Bank’s 2% target later in the decade. For households and businesses, that means the recovery depends heavily on how long higher energy prices persist.