UK Inflation Forecast to Stay High Through 2025, Warns Deutsche Bank

UK inflation expectations are set to remain elevated throughout 2025, according to Deutsche Bank economist Sanjay Raja. The latest inflation data from the Bank of England (BoE) and the Citi/YouGov survey show both short-term and long-term inflation expectations rising to 3.9%—well above historical averages.

This spike in inflation expectations is putting pressure on the UK economy and may influence future monetary policy decisions by the Bank of England’s Monetary Policy Committee (MPC).

Rising Inflation Expectations Signal Persistent Economic Pressure

Raja highlighted that medium-term inflation gauges have increased to levels "a little above what could be explained by observed moves in the equivalent short-term measure,” signalling deeper inflationary pressures within the economy.

He predicts short-term inflation expectations will remain around 4% for most of 2025, driven by rising food prices, energy costs, and continued growth in the Consumer Price Index (CPI).

“We anticipate both short-term and long-term inflation expectations will remain above their long-run averages throughout the year,” said Raja. “This persistent inflation outlook will likely keep the MPC cautious, especially regarding potential second-round effects.”

Interest Rate Cuts at Risk Amid Inflation Concerns

Despite Deutsche Bank’s forecast that the MPC may cut interest rates several times in 2025—if the labour market continues to ease—the bank warns that rising inflation could derail those plans. A sharp increase in CPI and inflation expectations might force the MPC to pause any rate cuts until there is more clarity around 2026 wage growth.

According to Raja, these inflationary risks create a “one-sided” threat to the UK economic outlook, potentially delaying monetary easing.

Latest Inflation Surveys Support Deutsche Bank’s Outlook

Supporting Deutsche Bank’s warning, the latest BoE/Ipsos survey found UK household inflation expectations for the next 12 months rose to 3.4% in February—marking the highest level since August 2023.

Additionally, the Bank of England’s Decision Maker Panel survey revealed that UK business leaders also expect higher consumer price inflation in early 2025.

(Sources: investing.com, reuters.com)