One of our main calls for 2026 is that the UK will no longer look like an outlier on inflation. Food inflation, which is highest in Western Europe, should come down. Services inflation will come dramatically lower from April. Lower energy prices help, too. Headline CPI should fall from 3.2% in November to 2% from April onwards – and could perhaps dip below.
If that sounds good for consumers, then remember that wage growth is also falling rapidly. Unemployment is rising, too, so when you net that all off, real disposable incomes are unlikely to grow in 2026. More importantly, the Bank of England is highly reticent to cut rates much further from here. We expect two more cuts in March and June, leaving Bank Rate at 3.25%. Markets are even more cautious than that.
But the committee is incredibly divided, which means it only takes one official to change their view in order to drastically change the path of interest rates. As it becomes more evident that last year’s food price spike hasn’t yielded a more persistent bout of inflation, could we see one or two of the hawks drop their opposition to cuts? We wouldn’t rule out rates going below 3%.
Crucially, corporate and household balance sheets are healthy enough to support more borrowing – a crucial difference to the post-financial crisis period. Household debt as a share of income is considerably lower than during the financial crisis, having fallen from 134% to 116% since 2022 alone. Credit to non-financial corporates was 59% of GDP as of Q3 last year, down from 70% in 2019.