BAF NEWS

TL;DR

The Budget modestly lowers inflation in 2026 but does not bring it to target that year. Markets welcomed the signal, yet the tax take rises to historic levels by the end of the forecast.

UK Budget 2025 inflation impact: headline numbers for 2026

The UK Budget 2025 inflation impact is measurable but contained. The OBR estimates an average 0.3 percentage point reduction in 2026 CPI, with a peak quarterly effect of -0.5pp in Q2. HM Treasury highlights a roughly 0.4pp cut to inflation in 2026–27, consistent with the UK CPI 2026 projection reported alongside the Budget.

Moreover, this aligns with the OBR inflation forecast 2026 narrative that policy lowers the price level’s near‑term momentum rather than reshaping the entire path. Therefore, the disinflation is meaningful but temporary.

Inflation outlook: above target through 2026, back to 2% in 2027

Despite the policy drag, the OBR inflation forecast 2026 keeps CPI above target. The OBR now projects 3.5% in 2025 and 2.5% in 2026, with a return to the Bank of England 2% target in 2027. That UK CPI 2026 projection is higher than in March, reflecting stickier near‑term pressures.

In the broader European context, core disinflation across the euro area remains uneven. Consequently, UK‑EU supply chains and energy dynamics can still transmit price shocks, even as domestic policy leans disinflationary.

Timeline: 2026 cut, 2027 target, 2028 offset, 2030–31 tax peak

If the 2026 disinflation holds, 2027 target attainment follows. But the OBR also flags a small offset later: government policy adds about 0.1pp to CPI in 2028 due to new EV duties. Meanwhile, the tax take climbs, with the ratio approaching a record near 38% of GDP by 2030–31.

Therefore, the sequence is clear: a one‑year price relief in 2026, target in 2027, a minor 2028 add‑back, and a rising fiscal burden into the next decade. This is consistent with both the UK CPI 2026 projection and a tightening fiscal profile.

How the UK Budget 2025 inflation impact is delivered

Policy transmission is concentrated in household bills and transport costs. Energy‑bill support, including an average cut of about £150 from April, leads the effect. In addition, the extended 5p fuel duty cut until August 2026 and freezes on rail fares and prescription charges reinforce the disinflation.

Together, these measures explain why the UK Budget 2025 inflation impact shows up strongly in 2026 prints. However, once these temporary supports fade, the impulse wanes.

Tax stance: Budget lifts burden to historic highs

Alongside relief on prices, the Budget 2025 tax burden rises. Measures are projected to raise roughly £26 billion a year by the end of the period, pushing the tax‑to‑GDP ratio toward an all‑time high near 38% by 2030–31. The budget 2025 tax burden thus becomes a central macro constraint as households and firms adjust.

Moreover, the budget 2025 tax burden interacts with monetary settings. Therefore, tighter fiscal and cooling inflation could eventually give the Bank room to reassess its stance, conditional on the data.

Markets and monetary policy: positive reaction, BoE remit unchanged

Market reaction gilts sterling was positive into and after the announcement. Brokers noted the disinflationary tilt, and 10‑year gilt yields edged lower, while sterling firmed. As a result, the market reaction gilts sterling narrative points to improved credibility and a marginally easier inflation path for 2026.

At the same time, the Chancellor reaffirmed the Bank of England 2% target and the Bank’s operational independence, there is no change to the MPC’s remit. The letter also confirms the Asset Purchase Facility remains in place for 2026–27, maintaining continuity in the framework. Therefore, policy signaling is steady, even as the inflation mix shifts.

In the broader European context, investors will watch how ECB rhetoric and euro‑area prints interact with UK pricing. Cross‑channel moves in energy and traded goods still matter for term premia and FX channels.

Ripple effects: Europe, trade, and corporate planning

UK pricing interacts with EU supply chains and global energy flows. If European demand stabilizes while UK disinflation persists, margins in traded sectors could improve. Conversely, if imported pressures revive, the OBR inflation forecast 2026 path could face upside risks.

For corporates, a modestly lower price path in 2026 supports wage‑price normalization. Yet, higher structural taxes may weigh on capex and M&A appetites, particularly for domestic‑exposed sectors.

What’s next

Watch the 2026 CPI releases for confirmation of the UK Budget 2025 inflation impact. Track MPC communications for any shift contingent on the Bank of England 2% target being in sight. Also monitor the persistence of energy and transport supports, and note any follow‑on policies that could change the UK CPI 2026 projection.

Ripple effects: Keep an eye on EU inflation surprises, sterling’s trade‑weighted path, and funding costs in gilts. If growth slows while inflation softens as signaled, a gradual easing bias could emerge, data permitting.