UK Economy Splits into Two Halves as Inflation Expectations Dip

The UK economy experienced two distinct halves in 2025-2026. In the first half, from September to February, underlying disinflationary trends continued, and the labour market accumulated slack. Headline inflation from one-off tax changes and energy disturbances began to subside, while wage growth and services price inflation moved closer to target-consistent rates.

As a result, successive forecasts shifted towards lower inflation and higher unemployment. In fact, UK Medium-Term Inflation Expectations ticked down in recent periods, with unemployment expectations deteriorating.

The second half of the year, from March to now, was marked by the conflict in the Gulf and disruption to global energy supplies. Higher oil and gas prices raised headline inflation through direct and indirect effects, forcing monetary policy to focus on potential risks of more persistent second-round changes in wage and price-setting.