The Consumer Price Index stood at 3.5% in September, well above the Bank’s 2% target. With the energy price cap expected to rise by a further 16% or more in January 2027, NIESR now forecasts inflation will peak at 4.4% in February 2027 before averaging 3.9% across 2027 and 3% in 2028 — not returning to target until late 2030, around two years later than both the Office for Budget Responsibility (OBR) and the BoE are projecting.
NIESR’s concern is that the Bank has been too slow to respond. Because inflation forecasts for 2027 rose by 1.8 percentage points while the base rate barely moved, the real policy rate has fallen by around 150 basis points in the face of an inflationary shock — meaning monetary policy has effectively loosened when it should have tightened.
That risk is compounded by the labour market. Inflation will peak in early 2027 just as around three-quarters of the year’s pay awards are being settled. Households expect inflation of 4.2% over the next 12 months; businesses expect to raise prices by around 4%; and around 90% of private-sector employees work in sectors where median pay growth already exceeds the current rate of inflation. Unemployment has fallen to 4.7% — below NIESR’s own 5% estimate of the natural rate — giving workers continued bargaining power at exactly the moment when high inflation expectations make them most likely to use it.
Budget adds to the pressure
NIESR also flagged concerns about the October Budget. Fiscal headroom fell to £14.5 billion, from £23.6 billion in March, with borrowing higher than the March plan in every year by a cumulative £57 billion to 2029-30.
The think tank described the deficit reduction plan — which requires a £100 billion turnaround in the primary balance over five years — as lacking credibility, warning that high government borrowing is contributing to elevated gilt yields and compounding the challenge facing the MPC.