Brits are facing the highest inflation in the G7 as the country reels from the impact of Labour’s tax raid.
The OECD has given a stark warning about the backdrop for Rachel Reeves as she prepares for a crucial Budget.
The international body said price pressures would be worse in Britain this year than any other major economy – and only behind the US next year.
Growth has been pencilled in marginally higher this year at 1.4 per cent. But it is then seen as dropping to 1 per cent in 2026 as higher tax and spending cuts squash activity, adding to a hit from US President Donald Trump‘s tariff hikes.
The report emerged as separate PMI figures suggested growth in the private sector has slowed to its weakest level since May – with higher business costs meaning ‘subdued’ demand and further job cuts.
The bleak figures suggest the UK is at risk of another bout of ‘Stagflation’, where prices surge but the economy stalls.
The OECD has given a stark warning about the backdrop for Rachel Reeves as she prepares for a crucial Budget
Separate PMI figures suggested growth in the private sector has slowed to its weakest level since May – with higher business costs meaning ‘subdued’ demand and further job cuts
Inflation is expected to reach 3.5 per cent in 2025, 0.4 percentage points higher than the OECD forecast before.
In contrast the rates are anticipated at 3.1 per cent in Japan, 2.7 per cent in the US, 2.2 per cent in Germany, 2 per cent in Canada, 1.9 per cent in Italy and 1.1 per cent in France.
The headline CPI stood at 3.8 per cent in August, unchanged from July but far above the official 2 per cent target. Food inflation has nudged over 5 per cent again, with concerns retailers are having to pass on pressures.
Inflation is seen as sticking far above the Bank of England‘s target next year, at 2.7 per cent, with soaring food prices pushing up the cost of living.
That would still be the second highest rate in the G7, behind only the US.
In its interim economic outlook, the OECD said the UK would be held back by ‘a tighter fiscal stance, higher trade costs and uncertainty’ which it said would ‘drag on external and domestic demand’.
Ms Reeves is facing a titanic struggle to balance the books at the Budget on November 26, with fears she will have to bring in tens of billions more in taxes.
The Chancellor said the OECD figures ‘confirm that the British economy is stronger than forecast – it has been the fastest growing of any G7 economy in the first half of the year’.
She added: ‘But I know there is more to do to build an economy that works for working people – and rewards working people. That is what I’m determined we deliver through our plan for change.’
Shadow Chancellor Sir Mel Stride said: ‘The OECD confirms what hard-working families already feel – under Labour, Britain is in a high tax, high inflation, low growth doom loop.
‘Rachel Reeves seems to think the solution is yet more tax rises. The UK is now teetering on the edge of stagflation, all driven by Labour’s economic mismanagement.
‘This should be a wake-up call to the Chancellor: you can’t tax your way to growth.’
The UK economy grew by 0.7 per cent over the first three months of the year and by 0.3 per cent over the second quarter, official figures show.
The OECD also warned that growth in the world’s economy will noticeably weaken over the rest of the year as higher US tariffs take effect, dampening global trade and investment.
The global economy was stronger than expected over the first half of 2025 but activity will ‘soften noticeably in the second half of this year’, it said.
This is partly due to ‘front-loading’ delivering a boost to goods production and trade – referring to a rush of imports over the first half.
This has happened as businesses made more shipments as they tried to get ahead of steeper levies on their exports, as a result of Mr Trump’s policy changes.
