Britain on the verge of stagflation? OECD warns of high inflation and low growth

Britain is facing renewed fears of stagflation after the Organisation for Economic Cooperation and Development warned that the United Kingdom will endure high inflation alongside sluggish growth. The Paris-based organization projects the economy will grow about 1.4% this year and around 1% in 2026, with inflation easing only gradually to about 2.7% in 2026 from an estimated 3.5% this year. The combination of price pressures and weak expansion places the UK among advanced economies most exposed to cost-of-living pressures as households adjust to higher bills and tighter budgets.

Britain is singled out for its persistent cost-of-living pressures, with food inflation highlighted as a key driver of household pressures. The OECD said the UK will have the highest inflation among G7 economies this year, a distinction that compounds political and policy tensions as the Chancellor, Rachel Reeves, prepares for November’s Autumn Budget amid a hole in public finances potentially as large as £50 billion. Reeves described the OECD update as a reminder that there is more to do to build an economy that works for working people, and to ensure the gains are felt broadly. "These figures confirm that the British economy is stronger than forecast – it has been the fastest growing of any G7 economy in the first half of the year. But I know there is more to do to build an economy that works for working people – and rewards working people," she said.

The OECD’s outlook stresses the risk of stagflation as growth remains subdued even as prices stay elevated. The agency’s view is reinforced by a closely watched S&P Global PMI survey published this week, which showed private-sector output expanding at its slowest pace since May as higher costs constrained demand. When added to the OECD projections, the data point to a UK economy that continues to wrestle with the dual headwinds of cost pressures and a still-fragile growth backdrop.

Analysts and policymakers are also weighing more near-term domestic indicators. The Office for National Statistics showed the economy grew by 0.2% in the three months to July, a slower pace than in the prior two quarters. Consumer price inflation stood at 3.8% in August, significantly above the Bank of England’s 2% target and near the upper end of expectations for the year. Market participants recently priced in a lengthy period with little chance of near-term rate cuts, even as the OECD suggested a gradual easing of policy rates next year. The Bank of England’s base rate sits at 4%, after the central bank kept it unchanged at its latest decision.

The OECD’s assessment comes as the UK compares with its peers. In the near term, inflation remains higher in the UK than in the United States (where inflation is around 2.9% with growth near 2.1%) and in much of the euro area (inflation around 2.1% with growth about 1.5%). On government debt and deficits, investors have become more sensitive to Brexit-era fiscal legacies and ongoing public-finance pressures, supporting a rally in longer-dated gilts as caution about the path for inflation and growth persists. 30-year gilts recently traded above 5.5%, underscoring the market’s concern about the length and depth of the stagnation-inflation mix.

The OECD’s global forecast also notes that global GDP growth is expected to slow from about 3.3% last year to 3.2% in 2025 and then to roughly 2.9% in 2026. The report cautions that front-loading against U.S. trade tensions and tariff changes could continue to weigh on investment and trade, while policy uncertainty remains elevated in several big economies. The UK is among the outliers in its inflation path, with wage growth still running relatively hot compared with many peers, a situation the OECD warned would not ease without stronger productivity gains.

There is a sense among some market observers that the OECD’s UK view could prove overly pessimistic. Martin Beck, chief economist at WPI Strategy, argued that inflation and interest rates could be lower next year and that the UK might benefit from spillovers from looser macro policy in the United States and Europe. He also noted that households, having endured a string of shocks, may feel more confident about spending once prices stabilise and savings buffers recover. "Inflation and interest rates should both be lower next year, while the UK will also gain from spillovers from looser macroeconomic policy in the US and Europe," Beck said. This adds a note of cautious optimism to a landscape where the official outlook remains soft.

How the numbers fit into a broader UK picture is a matter of considerable policy focus. The OECD’s forecast places the UK behind the United States in nominal output growth this year while still showing resilience relative to some other advanced economies. It also highlights that achieving stronger growth while containing inflation will require a productivity push and structural reforms that support a more dynamic labor market and investment environment. Olivier Blanchard-era questions about how quickly the UK can tangibly raise productivity continue to echo through policy debates as Reeves and her team map a budget that aims to stabilize public finances while avoiding broad tax increases that could dampen growth. With the Autumn Budget looming, authorities face a delicate balance between restoring fiscal space and ensuring that the cost-of-living relief does not come at the expense of longer-run growth.

For investors and businesses, the OECD’s scenario reinforces a market backdrop in which inflation remains a persistent challenge even as growth stabilises, making the path toward rate cuts more gradual than in some other economies. In the near term, businesses are likely to remain cautious as input costs respond to global price dynamics and as domestic demand responds to household purchasing power. In this environment, the UK’s business and financial markets continue to weigh the balance between price stability and growth prospects, a dynamic that will be central to conversations around policy, investment plans and corporate strategy as the year progresses.