OECD warns UK faces highest inflation in G7 as Budget looms

An OECD interim economic outlook warned that the United Kingdom faces the highest inflation in the G7 this year as Labour's tax changes and an approaching Budget add pressure on households and businesses. The organization said a tighter fiscal stance—higher taxes and reduced government spending—would weigh on both external and domestic demand, complicating the task for Chancellor Rachel Reeves as she prepares for the November 26 Budget.

Inflation is forecast to reach 3.5% in 2025, up 0.4 percentage points from the OECD's previous projection. By comparison, inflation in Japan is seen at 3.1%, the United States at 2.7%, Germany at 2.2%, Canada at 2%, Italy at 1.9%, and France at 1.1%. The headline CPI stood at 3.8% in August, unchanged from July and well above the Bank of England's 2% target. Food inflation has nudged above 5% again, underscoring pressures on households as retailers pass through higher costs. The OECD said inflation is expected to stay well above the BoE target next year, at about 2.7%, making the UK the second-highest inflation among G7 economies behind the United States.

The OECD's outlook also warned growth will be restrained by a tighter fiscal stance, higher trade costs, and policy uncertainty. It projected growth for the UK to remain modest next year, with the pace slipping to around 1%. For this year, growth was seen higher at 1.4%, before decelerating to roughly 1% in the following year. Bank of England targets aside, the report underscores a struggle to balance the books as Reeves prepares for the Budget and questions about whether tens of billions of pounds in additional taxes will be needed to restore fiscal health.

Chancellor Reeves responded by saying the OECD figures show the British economy was stronger than forecast in the first half of the year and had been the fastest-growing G7 economy, while stressing there is more to do to build an economy that works for working people. Official data published earlier indicate the economy expanded by 0.7% in the first quarter and by 0.3% in the second quarter.

Beyond the UK, the OECD warned that global growth will weaken over the remainder of the year as higher tariffs in the United States take effect, dampening trade and investment. The organization noted that the global economy was stronger than expected in the first half of 2025 but that activity is expected to soften notably in the second half, in part due to front-loading that boosted goods production and trade in the early months as firms stocked up before steeper levies on exports.

The OECD’s interim outlook paints a world where policy choices in major economies, especially in the United States, and evolving trade costs are shaping a fragile path for growth. For the United Kingdom, the report highlights a difficult balancing act between stabilizing public finances and shielding households from further inflationary pressure, all while navigating a global environment that remains sensitive to tariffs and shifting demand.