In our latest UK Economic Outlook, we examine the impact of persistently higher energy prices on households and businesses, as well as the policy response that may be required from the Bank of England to contain inflationary pressures.
UK Economic Outlook - September 2026
UK Economic Outlook - September 2026
In our latest UK Economic Outlook we look at the prospects for the UK economy in 2026 and 2027, including our analysis of growth prospects, energy prices, inflation, interest rates, consumer spending, wage growth, investment, the labour market and public finances.
Summary of KPMG’s latest forecasts for the UK
September 2026
Following a strong performance in the first half of 2026, UK economic activity is set to slow as higher energy and borrowing costs weigh on households and businesses. Energy prices are likely to remain higher for longer, which could potentially force the Bank of England to raise interest rates later this year.
Growth remains resilient despite headwinds
Consumer spending is set to slow following a strong first half of the year. Higher energy prices will see household costs rise over the coming months, meanwhile wage growth is set to slow further, which will mean workers will see a fall in their purchasing power. Meanwhile, investment in AI-related software and equipment, which has been a key source of strength since the start of the year, is expected to continue its momentum into the second half of the year. However, broader business investment conditions are likely to remain weak as firms continue to grapple with higher borrowing costs.
Energy prices remain an upside risk for inflation outlook
Headline inflation is expected to rise over the coming months, as higher wholesale gas prices continue to feed through to household energy bills. While inflation has remained relatively contained since the onset of the latest energy price shock, the outlook beyond the autumn is more challenging. At current wholesale gas price levels, households could face around a 20% increase in energy bills in January. Lower gas storage levels ahead of winter, combined with the possibility of colder weather, could add further pressure to energy prices over the coming months. The disruption to Gulf energy flows is likely to last over the coming months, which means energy prices are likely to remain elevated during the winter and only gradually begin to fall from the first quarter of 2027.
The Bank of England's weaker labour market conundrum
The expected rise in headline inflation raises the prospect of an interest rate hike this year. Since the start of the year, the Bank of England has balanced the impact of higher energy prices against signs of easing domestic inflationary pressures and a weakening labour market. The weaker labour market has been a key source of downward pressure on inflation, unlike 2022. Wage growth has eased as labour market conditions have softened, with more workers competing for fewer vacancies. Meanwhile, higher input and borrowing costs have left businesses reluctant to hire. This has been a key factor behind the Bank’s cautious approach this year. However, with the outlook for inflation worsening, the Bank may be forced to hike, adding further pressure to an already weak labour market.
Growth remains resilient despite headwinds
Consumer spending is set to slow following a strong first half of the year. Higher energy prices will see household costs rise over the coming months, meanwhile wage growth is set to slow further, which will mean workers will see a fall in their purchasing power. Meanwhile, investment in AI-related software and equipment, which has been a key source of strength since the start of the year, is expected to continue its momentum into the second half of the year. However, broader business investment conditions are likely to remain weak as firms continue to grapple with higher borrowing costs.
Energy prices remain an upside risk for inflation outlook
Headline inflation is expected to rise over the coming months, as higher wholesale gas prices continue to feed through to household energy bills. While inflation has remained relatively contained since the onset of the latest energy price shock, the outlook beyond the autumn is more challenging. At current wholesale gas price levels, households could face around a 20% increase in energy bills in January. Lower gas storage levels ahead of winter, combined with the possibility of colder weather, could add further pressure to energy prices over the coming months. The disruption to Gulf energy flows is likely to last over the coming months, which means energy prices are likely to remain elevated during the winter and only gradually begin to fall from the first quarter of 2027.
The Bank of England's weaker labour market conundrum
The expected rise in headline inflation raises the prospect of an interest rate hike this year. Since the start of the year, the Bank of England has balanced the impact of higher energy prices against signs of easing domestic inflationary pressures and a weakening labour market. The weaker labour market has been a key source of downward pressure on inflation, unlike 2022. Wage growth has eased as labour market conditions have softened, with more workers competing for fewer vacancies. Meanwhile, higher input and borrowing costs have left businesses reluctant to hire. This has been a key factor behind the Bank’s cautious approach this year. However, with the outlook for inflation worsening, the Bank may be forced to hike, adding further pressure to an already weak labour market.
