European Economics Analyst UK—Inflationary Pressures Probably Not Sufficient to Push the BoE to Hike

Economics Research 25 August 2026 | 10:25AM BST

UK—Inflationary Pressures Probably Not Sufficient to Push the BoE to Hike

n This Analyst updates our assessment of the UK inflation outlook and discusses the James Moberly | implications for monetary policy. Goldman Sachs International

n Our near-term energy inflation forecasts are higher than the BoE’s after the recent rebound in oil prices. But our strategists’ oil and gas forecasts are below futures, implying a sharper decline in consumer energy prices than the Bank expects in 2027. n Underlying services inflation remains somewhat elevated. Our analysis indicates that much of the cost pressure facing services companies has been driven by strong wage growth in consumer-facing service sectors and the employer National Insurance hike. With labour cost growth now easing, underlying services inflation should slow next year, although we expect this should be partially offset by faster price increases in non-underlying components. n We expect core goods inflation to accelerate in the near term; a summary measure of leading indicators signals firm sequential momentum, and our analysis suggests that input costs should remain elevated. But pressures should ease from mid-2027 given lower energy prices and easing distribution sector cost growth. We continue to expect food inflation to accelerate later this year as input costs rise, but soft leading indicators point to a slower pickup than the BoE expects. n Our estimates imply that headline inflation will peak at 3.3% in November, slightly above the BoE’s projection but below the threshold that would likely cause the MPC to become more concerned about second-round effects. We then expect inflation to fall faster than the Bank forecasts next year as energy prices drop. Given this outlook, we continue to think that market pricing for Bank Rate – which implies over two hikes by mid-2027 – looks too high. We instead expect the MPC to hold this year before cutting in 2027.

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Goldman Sachs European Economics Analyst

UK—Inflationary Pressures Probably Not Sufficient to Push the BoE to Hike

UK inflation has remained elevated as rising wholesale energy prices have prevented a return to target, although the numbers since the start of the Middle East conflict have been lower than the BoE had initially feared. In this Analyst, we update our assessment of the outlook and discuss the implications for monetary policy.

Consumer Energy Prices Set to Remain Elevated in 2026 but Fall in 2027 We start by updating our energy inflation projections. Our baseline estimates are conditioned on our strategists’ commodity price forecasts. These lie below futures curves, especially for gas.1

Exhibit 1: Our Strategists’ Energy Price Forecasts Are Below Futures Curves, Especially for Gas

Source: Goldman Sachs Global Investment Research, Bloomberg

Given these assumptions, our model implies a further uptick in consumer energy inflation in the near term given the recent rebound in petrol and diesel prices. But our model implies that energy inflation should fall sharply in 2027 given declining wholesale prices and base effects, with the contribution from energy prices to headline inflation dropping to -0.5pp in 2027Q4. Using futures prices would instead imply a smaller -0.2pp impact, while the BoE forecasts assume a -0.1pp drag.

1 Our road fuel price forecasts are also conditional on our strategists’ forecast for crack spreads and exchange rates. To model the Ofgem price cap – which is determined by futures prices averaged over an observation window – we assume futures prices are unchanged in the very near term before switching to pricing our strategists’ forecast path. This means that our 2027Q1 price cap estimate is currently influenced roughly equally by market pricing and our strategists’ forecasts, while the latter entirely determined the projection for the cap from 2027Q2 onwards. (Note that the observation window for the 2026Q4 price cap has already ended). Our assumptions for…