OECD warns UK faces stagflation risk as inflation remains highest in the G7

The Organisation for Economic Cooperation and Development warned on Tuesday that Britain faces the risk of stagflation as inflation remains stubbornly high while growth slows. In its latest assessment, the Paris-based group forecast the UK economy will grow about 1.4% this year and around 1% in 2026, while inflation is seen at roughly 3.5% this year and 2.7% next year. The OECD notes that the UK is forecast to retain the highest inflation among G7 economies this year, a finding that compounds concerns about the cost of living for households.

The report arrives as Chancellor Rachel Reeves comes under intensified pressure ahead of the Autumn Budget in November, as officials try to close a public-finances gap that some estimates put at as much as £50 billion. The OECD acknowledged that the economy has performed relatively well in the first half of the year, calling the outcome “stronger than forecast,” but warned that higher prices and slower growth could deepen the pain for households.

The OECD’s inflation projections underline the ongoing cost-of-living challenge. It noted that food prices remain a particular pressure for UK households, contributing to a price spiral that could keep pressure on consumer wallets even as growth remains tepid. The UK is projected to remain an outlier among advanced economies in wage growth and inflation dynamics, with markets watching for any signs of a shift in policy from the Bank of England and From the fiscal side, the fall in growth could complicate efforts to stabilize debt as interest payments rise.

The agency’s outlook also implies a cautious path for monetary policy. The Bank of England has kept the policy rate at 4% and has signaled that it will remain vigilant about inflation, even as some growth indicators soften. The OECD, however, expects only a gradual easing of policy rates next year, a stance that would contrast with market expectations for possible easing later in 2025 if inflation continues to cool. Investors are weighing whether the UK can escape deeper stagnation without compromising price stability.

July and August data have painted a mixed picture of activity and prices. Official figures showed the economy grew 0.2% in the three months to July, down from 0.3% in the three months to June and 0.6% in May. Meanwhile, the consumer prices index rose 3.8% in August, well above the Bank of England’s 2% target, and inflation is expected to peak in the near term before easing in 2026. In the global context, inflation remains elevated in the UK relative to the United States, where inflation has cooled more quickly, and the euro area, where price pressures have been easing but growth remains modest.

The OECD’s snapshot also highlighted the wider global environment. Global GDP growth is projected to slow from roughly 3.3% in 2024 to 3.2% in 2025, before easing to about 2.9% in 2026. It noted that trade tensions, tariff pass-through and high policy uncertainty could dampen investment and trade in the months ahead, even as some economies experience improving inflation dynamics and easing wage gains. The UK’s trajectory stands out, with the OECD warning that wage growth has not yet moderated in the same way as in many other advanced economies.

Shadow Chancellor Sir Keir Starmer’s Labour shadow team seized on the OECD’s findings to argue that Britain is in a high-tax, high-inflation, low-growth cycle under the current government. Reeves has stressed the need to build an economy that works for working people, but critics say the party’s approach risks raising taxes further amid weak growth. The OECD’s assessment aligns with broader market concerns that debt-service costs and persistent inflation could complicate fiscal consolidation if growth does not pick up.

In a broader policy context, the OECD warned that inflation in the UK would remain high relative to peers unless there are lasting improvements in productivity growth. The report also noted that in the United States, tariff-related pass-through to prices could bolster inflation further as import costs rise, while price pressures in Europe have shown more signs of easing amid improving growth in some member states. The UK economy remains more exposed to cost-of-living pressures than many of its peers, a factor that will be keenly watched as policymakers map out the budget and the monetary response over the next year.

Retail activity has shown resilience in the face of cost pressures, offering some counterweight to the slowdown in other sectors. Analysts caution that a strong consumer may help cushion the economy from more pronounced downturns, but that does not fully offset the risk of stagnation if real incomes keep shrinking under a high-inflation regime. Some forecasters have argued that a more supportive macro policy mix in the US and Europe could indirectly help the UK through spillovers, even as domestic constraints linger.

The upcoming Autumn Budget remains pivotal. If the OBR assessment released alongside the Budget mirrors the OECD’s dour outlook, Reeves may face fresh calls to recalibrate fiscal plans to protect households while maintaining room for growth-focused investments. The combination of high inflation, uncertain demand, and a difficult debt picture could define the trajectory of the UK economy into 2026, prompting a careful balancing act by policymakers as they seek to avert a protracted stagnation.

Caution remains warranted as the OECD’s forecast sits against a backdrop of evolving global conditions. While the agency projects a moderation in inflation next year and gradual policy easing, the actual path will hinge on productivity gains, any shifts in global demand, and how households respond to price changes in the months ahead.

There is still divergence about how quickly inflation will ease and how strong the rebound in growth may be. Some economists view the OECD’s UK outlook as overly pessimistic, pointing to signs of consumer resilience and potential policy relief in the US and Europe that could feed through to the UK. Others warn that the country’s structural challenges—particularly productivity growth—could keep the economy exposed to high costs and weak investment for longer than expected. In the near term, the path of inflation, the status of public finances, and the policy choices of the Bank of England will be closely watched as the Autumn Budget approaches. The OECD’s findings underscore the complexity of the current moment, with price stability and sustainable growth remaining intertwined in Britain’s fiscal and economic calculus.