UK Inflation Forecast to Rise as Higher Energy Costs Push Up Household Bills

The UK's recent slowdown in inflation could prove temporary, with the National Institute of Economic and Social Research (NIESR) forecasting that inflation will rise again over the coming months as higher energy costs feed through into household bills and the wider economy.

NIESR expects Consumer Prices Index (CPI) inflation to increase from 2.6% in June 2026 to around 3.8% in early 2027, driven largely by higher oil and energy prices following the recent Middle East conflict. The think tank also forecasts inflation will remain above the Bank of England's 2% target until early 2029.

Higher inflation reduces households' purchasing power by increasing the cost of everyday goods and services. NIESR expects higher energy prices to feed through into transport, food and other living costs, putting renewed pressure on household budgets.

The report also estimates that stronger inflation will reduce the real value of the Government's planned public spending by around £24 billion by the end of the decade, increasing pressure on future budgets.

In its central forecast, NIESR expects the Bank of England to keep Bank Rate at 3.75% throughout 2027. However, it says policymakers could respond differently if energy prices rise more sharply than expected or inflation proves more persistent.

For households, the outlook suggests the recent improvement in inflation may not last. Although inflation remains well below the highs seen in 2022, a renewed rise could keep pressure on the cost of living and delay any meaningful reduction in borrowing costs, including mortgage rates.

Markets and homeowners will be watching closely to see whether higher energy prices feed through into future inflation data, as this could influence the Bank of England's decisions on interest rates in the months ahead.