UK economy to grow more than expected - but households face sharper rise in inflation, IMF says

The UK economy is set to grow faster than expected this year, though households are expected to face higher rates of inflation, according to forecasts from the International Monetary Fund (IMF).

UK gross domestic product (GDP), a key economic measure of everything produced in the economy, is set to grow by 1.3% this year - up from a predicted 1% rise.

However, the latest world economic outlook cautioned that growth for next year is expected to slow to 1.2%, down from a previous forecast of 1.3%.

The influential global economics body also indicated UK households will face a sharper rise in inflation than previously forecast, which will remain higher for longer.

Consumer prices are set to rise by 3.3% in 2026 - up from a previous prediction of 3.2% - as the conflict in the Middle East increases food and energy costs.

This would mark the joint second-highest rate among the G7.

Inflation is also anticipated to persist at a higher rate for longer than previously expected, only slowing to an estimated 2.8% next year - significantly higher than the 2.4% rate previously forecast.

The most recent figures from the Office for National Statistics (ONS) showed that inflation increased to 3.1% in August and is expected to tick higher over the coming months, amid pressure from higher household energy bills.

The Bank of England has said it expects UK inflation to lift to "slightly above 4%" in the first four months of 2027, in part due to another increase in the household energy price cap in January.

Inflation is then expected to swing back lower throughout the year.

The latest report also indicated that the labour market had been more resilient than expected, with UK unemployment set to strike 5.3% this year, down from a prediction of 5.6%.

The IMF said an upward boost from the adoption of AI technology had helped many global economies grow this year.

However, the body warned that a prolonged stalemate or further escalation in the Middle East could "keep energy and food prices elevated and volatile", weigh on economic growth and worsen the fiscal position of governments.

It also indicated that this could be further amplified by extreme weather, cyber attacks and attacks on energy infrastructure.

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Responding to the IMF's forecast, John Healey, who will hold his first budget on 28 October since becoming chancellor, said: "Conflict in the Middle East and Europe is hitting people in the UK and around the world.

"But Britain's economy is showing strong international resilience in the face of these challenges: we're forecast to be the joint second fastest-growing G7 nation in 2026 and have the lowest deficit in the G7 by 2031."

He added he would meet international finance ministers in Bangkok, where the annual meetings of the IMF and World Bank are taking place, to discuss how to limit the impact of conflicts, while "maintaining strong fiscal discipline".

However, shadow chancellor Andrew Griffith said Mr Healey "must tackle both problems in the budget by getting Britain drilling and dealing with out-of-control welfare spending".

"If the chancellor reaches for more tax rises instead, he is choosing slower growth and working people will pay for it," he added.

Use our Economic Pressure Tracker to explore how the conflict is affecting the UK and your household.

(c) Sky News 2026: UK economy to grow more than expected - but households face sharper rise in inflation, IMF says