The UK inflation outlook for 2025 is clouding over, with rising energy bills already pushing prices higher and economists forecasting another step up later in the year, even as the worst-case scenarios from the war in Iran have so far failed to materialise.
To understand where things stand, it helps to start with the basics. A small degree of price rises is a normal feature of a healthy economy. The problem is that after a sharp inflation spike earlier in the war in Ukraine, food alone now costs around a third more than it did four years ago, making it hard for many households to feel the benefit of calmer conditions.
Food and energy: the pressure points in the UK inflation outlook
The immediate trigger for the latest rise in the headline rate is energy bills, which moved higher last month as the fallout from the conflict in Iran continued to feed through. Yet energy prices have not been as aggressive as many economists initially feared, and crucially that relative restraint has kept food inflation in check for now. Food price inflation was running at 1.3%, its lowest level for close to five years, according to the latest figures.
That picture may not hold. Energy costs tend to take many months to pass through supply chains before they show up in the price of groceries and other goods, meaning the squeeze could intensify. Economists expect inflation to reach around 3.5% later in the year.
Separate data reported by Forbes points in the same direction. Food prices rose by 4.9% in October, up from 4.5% in September, suggesting the category is already accelerating again. The core rate of inflation, which strips out volatile items such as energy, food, alcohol and tobacco, rose by 3.3% in the 12 months to October 2024, a figure that will concern policymakers trying to judge how deeply embedded price pressures have become.
On the energy side, the price cap is estimated to rise by around 1% on 1 January 2025, taking it to roughly £1,736 a year. That increase is considerably smaller than the extraordinary surges seen after the Ukraine war began, and the current trajectory suggests bills will remain the best part of £1,000 below the peak reached at that time. But even a modest rise compounds the strain on household budgets that have already absorbed years of above-target inflation.
What the Bank of England and the government face next
For the Bank of England, the picture is finely balanced. The Bank cut interest rates to 4.75% at its November 2024 meeting, a move that reflected its view that inflation would return to its 2% target over the medium term. Rate changes take time to work through the economy, and the relatively contained food inflation figures give the Bank some reason to believe that price pressures have not spiralled out of control. Flat jobs data and moderate wage growth add to that reading, since firms tend to find it harder to push through price increases when employment conditions are softer.
Even so, some analysts think rates may not rise this year, though the risk has not disappeared entirely. Services inflation remains stubborn, and there is always the possibility that the headline rate climbs faster than expected. Wages and benefits have broadly been outpacing inflation this year, which has eased the squeeze for many people, but that cushion could thin if prices accelerate more sharply in the months ahead.
The political pressure is building in parallel. Prime Minister Andy Burnham and Chancellor John Healey face growing calls to offer more support ahead of the Budget. Any assistance, though, comes with trade-offs: higher taxes, or less money for public services. Some observers have questioned whether further intervention is warranted given that the current inflation episode, though uncomfortable, is far less severe than the crisis that followed the start of the Ukraine war.
The biggest risk hanging over all of this is a prolonged conflict in the Middle East. A drawn-out war could destabilise energy markets again and push inflation well above the forecasts that analysts are currently working with. The government, the UK government and households alike would face a fresh and unwelcome set of pressures if that scenario plays out. The energy price cap increase due on 1 January 2025 now stands as the next concrete moment when the cost of the conflict lands directly on people’s bills.
