Inflation will be higher than expected throughout 2026 as the conflict in the Middle East pushes up energy prices, the British Chambers of Commerce has warned.
Economists at the influential business group also warned that UK economic growth will slow and unemployment will continue rising, in a downbeat outlook for the Government.
The BCC’s latest economic report said the geopolitical situation remains “highly uncertain” but could “change the economic outlook considerably”.
It predicted that UK Consumer Prices Index inflation – which was 3% in January – will be at 2.7% by the end of the year. It had previously predicted it would have slowed to 2.1%.
Elevated inflation is linked to higher oil and gas prices due to the conflict in the Middle East, which is expected to push up energy prices in the near term.
The projections indicated that energy prices are then assumed to start easing back, allowing for overall inflation to drop back to the Bank of England’s target of 2% next year.
It said inflation is likely to drop to 1.9% by late next year as energy prices drop and wage growth moderates.
The forecasts come after the Chancellor’s spring statement last week, which confirmed the Office for Budget Responsibility had cut the UK’s economic growth outlook.
The OBR said the economy is forecast to grow by 1.1% in 2026, lower than the previous forecast of 1.4% made by the OBR in November last year.
The BCC predicted that UK GDP (gross domestic product) will grow by 1% this year, down from a previous 1.2% forecast.
It has also forecast growth of 1.3% in 2027 and 1.1% in 2028.
Unemployment is also expected to worsen throughout 2026, the BCC said.
Economists said they expect UK unemployment – which was most recently recorded at 5.2% – to rise as high at 5.5% this year, in a significant increase from a previous forecast of 5.1%.
The BCC expects inflation to remain high through 2027 “due to persistent high labour costs and hiring uncertainty”.
David Bharier, head of research at the BCC, said: “The UK economy remains stuck in a low-growth pattern.
Our forecast of just 1% growth in 2026 reflects weak productivity, subdued investment and cautious consumer spending.
“The recent escalation of conflict in Iran risks interrupting progress made on inflation.
“Higher energy prices linked to it could keep inflation firmly above the 2% target and lead the Bank of England to hold the interest rate longer than expected.”
Chancellor Rachel Reeves warned on Monday that America and Israel’s war with Iran is “likely to put upward pressure on inflation” over the coming months.
Prime Minister Sir Keir Starmer said the longer the war in the Middle East continues, the more likely it is there will be economic damage in the UK.
Ms Reeves said she was ready to support “a co-ordinated release” of international oil reserves to ease the economic shock of the crisis and called for action to “guarantee the security of vessels passing through the Strait of Hormuz”.
The Chancellor met the finance ministers of other G7 nations on Monday to discuss the possibility of such a release, but it concluded without agreement on any solid action.
Speaking in the House of Commons after the meeting, Ms Reeves said: “My economic approach will both be responsive to a changing world and responsible in the national interest.
“The economic impact of the situation in the Middle East will depend, of course, on its severity and its duration.
“The movements that we have already seen are likely to put upward pressure on inflation in the coming months.”
