Economic update: Beating the forecasts, for now

The new session of Parliament began on 13 May with the King’s Speech, and the government already has a lot to deal with in economic terms. Although both inflation and economic growth have beaten forecasts in the past month, there are signs that this may not last.

Inflation falls and growth rises…

Inflation, as measured by the Consumer Prices Index (CPI), fell to 2.8% in April, down from 3.3% in March. This was below the 3.0% forecast by the Bank of England in its April 2026 Monetary Policy report. As the Bank had predicted, the fall in inflation was driven by electricity and gas prices, which were lower in April 2026 than they had been the previous year because of a lower Ofgem price cap, and because of government policy changes that removed some of the funding for the Renewables Obligation scheme from energy bills.

The Bank had also predicted a rise in fuel prices as a result of the conflict in the Middle East (as we discussed back in March), which offset the decrease in electricity and gas prices. As the chart below shows, the Bank’s lower forecast of overall inflation was because it had predicted a larger increase in the cost of food and of services than actually happened.

Note: Categories in “actual inflation” breakdown are approximate and based on descriptions in the Bank of England Monetary Policy Report.

Source: ONS, Consumer price inflation tables, 20 May 2026, and Bank of England, Monetary Policy Report - April 2026, 30 April 2026

The most recent figures for economic growth were also higher than expected; GDP grew by 0.6% in the first quarter of 2026 (January to March), compared with October to December 2025. This was above the 0.3% forecast by the Office for Budget Responsibility in March 2026, and above the 0.5% forecast by the Bank of England in April 2026.

On 18 May 2026, the International Monetary Fund (IMF) increased its forecast for UK GDP growth in 2026 to 1.0%. This was up from its April 2026 forecast of 0.8% (although still below the 1.3% that it had forecast in January 2026, before the Middle East conflict).

…but the good news might be temporary

Most analysts expect inflation to begin to rise again in the next few months; on average, independent forecasters surveyed by HM Treasury in May think that CPI inflation will be around 3.5% in October to December 2026. This is partly because the energy price cap for July to September 2026 will rise, and this month’s removal of the Renewables Obligation from energy bills cannot be repeated.

Fuel prices are also expected to be a large contributor to inflation. As the chart below shows, trade volumes through the Strait of Hormuz at the time of writing are still far below where they were before the current conflict began, and oil prices are still much higher.

Source: IMF Portwatch and US Energy Information Administration, retrieved 20 May 2026

Oil prices directly affect the prices of things like motor fuels and heating oils, but they can also raise the prices throughout supply chains elsewhere in the economy (for example, if the cost of transporting food increases because of fuel costs, food prices are likely to rise to compensate for it). In April 2026, the Bank of England said that these indirect effects could raise the CPI inflation rate by about a third of a percentage point in July to September 2026.

The growth of 0.6% in GDP in the first quarter of the year may also not be the final figure. In a blog post on 14 May 2026, the Office for National Statistics (ONS) explained that it adjusts its GDP figures to exclude seasonal effects (such as increased consumer spending in the run-up to Christmas), and that it has to make changes to its adjustment processes as consumer behaviour changes.

As a result of its most recent changes, the ONS has downgraded the GDP growth that it had previously estimated in 2024 and 2025. It is currently unclear how much of the increase in GDP in January to March 2026 was because of economic activity that had been deferred from the previous quarter (perhaps by businesses waiting for the Autumn Budget before making new commitments), rather than genuinely new economic activity.

Long-term concerns

There are also more structural issues that might affect the economy in the longer term. The IMF warned on 18 May that factors such as “ambitious efficiency savings targets” and “uncertain yields from tax administration measures” may make it difficult to implement the UK’s fiscal strategy. For example, if the government is not able to make its efficiency savings or if it brings in less than expected from taxes, it may be harder to reduce the budget deficit without changing its spending plans. The IMF also said that “ageing, defense, and the climate transition” would put pressure on the public finances in years to come.

As the chart below shows, the labour market has also been showing changes. The number of payrolled employees has been steadily decreasing since mid-2024, and average earnings (adjusted for inflation) are about the same now as they were at the end of 2025.

Source: ONS datasets: payrolled employees, average earnings, vacancies, 19 May 2026

Businesses have been reporting a similar story, with respondents to S&P Global’s Purchasing Managers’ Index survey reporting reduced payroll numbers (PDF) for 20 months in a row.