NIESR sees UK inflation above target until late 2030 and one more hike as too little

UK consumer price inflation will not return to the Bank of England's 2% target until late 2030, the National Institute of Economic and Social Research (NIESR) said in its Autumn 2026 Economic Outlook, published on Wednesday, November 11. It expects a peak of 4.4% in February 2027.

The forecast follows the Bank's November 5 decision to raise Bank Rate to 4%, as FinanceInTime reported. NIESR, an independent research institute in London, argues that the rise and the one it expects next will not be enough.

Two years slower than the Bank and the OBR

NIESR said UK CPI inflation was 3.5% in September. With the energy price cap expected to rise by a further 16% or more in January, it now sees the peak at 4.4% in February 2027, up 0.6 percentage point from the 3.8% it forecast in July. It then expects inflation to average 3.9% in 2027 and 3.0% in 2028.

That path returns inflation to target around two years later than the Office for Budget Responsibility (OBR) and the Bank of England expect, NIESR said. The Bank's own summary of November 5 has a different shape: it expects inflation to rise to around 5% by the middle of 2027 and then to fall as the effect of higher energy prices fades.

Pay settlements arrive as prices peak

The institute's main reason is the timing of wage setting. "Inflation will peak in the early new year just as around three-quarters of 2027 pay awards are settled," the report says. Households expect inflation of 4.2% a year ahead, and firms expect to raise their own prices by around 4%, according to NIESR.

It also points to a labor market that has not loosened as it had expected. Unemployment has fallen to 4.7% this year, below the 5% that NIESR estimates as its natural rate, and around 90% of private-sector employees work in industries where median pay growth exceeds 4%, the report says. NIESR added that the data are uncertain.

One more rise expected, and a market path it prefers

NIESR expects the Monetary Policy Committee to raise Bank Rate once more, to a peak of 4.25% next year. "That will not be enough," the report says.

Market pricing has Bank Rate reaching around 4.75% next year, which NIESR calls "closer to what is needed." On that path, it estimates, inflation would return to target in early 2029, around 18 months sooner than in its central forecast, at a cost of around 0.4 percentage point off GDP growth in both 2028 and 2029. The gap between NIESR's expected peak and the market path is 50 basis points.

The institute raised its forecast for UK growth in 2026 to 1.6% from 1.1% in July, citing government spending and business investment, and expects growth of 1.1% in 2027 and 0.9% in 2028.

A thinner fiscal cushion after the October Budget

NIESR said the Budget of October 28 cut the government's headroom against its fiscal rules to £14.5 billion from £23.6 billion in March, a reduction of £9.1 billion. The 10-year gilt yield reached 5.5% on October 8, its highest level since 2000, and each percentage point on gilt yields adds around £10 billion a year to debt interest by the end of the decade, the report says.

The Bank of England's next decision is due on December 17, according to its schedule of MPC dates.

We think January's pay round matters more than the peak

Our reading is that NIESR's forecast matters less for its 4.4% peak, which is below the Bank's own estimate of around 5%, than for how long it expects inflation to stay high. If around three-quarters of 2027 pay awards are settled while inflation is near its peak and households expect 4.2%, a one-off energy shock could become a wage problem, the risk we weigh most heavily.

The opportunity is that the same report names a way out: an early settlement of the conflict would bring energy and food prices down faster than NIESR assumes. We would watch pay settlements in the first quarter and the January price cap more closely than the next inflation print. Our view would change if pay growth slows below 4% while unemployment stays at or above 4.7%, which would suggest the second-round effects NIESR fears are not taking hold.

The view in this final section is FinanceInTime's editorial opinion, for information only. It is not investment, tax, legal or other advice, and it does not take your circumstances into account. Forecasts are uncertain and past results do not guarantee future ones.