UK inflation will stay above the Bank of England's 2% target until 2030, according to new forecasts from the National Institute of Economic and Social Research (NIESR). The think tank expects inflation to peak at 4.4% in February 2027 — up from the 3.8% it forecast in July — driven by second-round wage effects from the war with Iran, which has pushed energy prices sharply higher.

Growth slows as joblessness rises

NIESR raised its growth forecast for 2026 to 1.6%, up from 1.1%, reflecting stronger government spending and business investment, partly driven by artificial intelligence. But it expects growth to slow to 1.1% in 2027 and 0.9% in 2028. The jobless rate is projected to rise gradually from 4.8% in 2026 to a peak of 5.1% in 2031, with wage growth averaging 3.9% over the coming three years as workers press for rises to compensate for high inflation. NIESR also said Chancellor John Healey's October Budget did little to strengthen the public finances.

Rates may need to reach 5%

The Bank of England raised Bank Rate to 4% from 3.75% last week, its first increase in more than three years. NIESR expects the Bank to raise rates only once more, in February, to 4.25%. But its economists calculate that borrowing costs would need to rise to around 5% to bring inflation back to target in the medium term — a move that would return inflation to 2% some 18 months earlier. Investors, by contrast, are pricing in two or three quarter-point rises by the end of next year.