As the autumn chill sets in across the UK, Chancellor Rachel Reeves is facing a challenging backdrop for the upcoming Budget.
New official figures reveal that inflation is holding steady at nearly double the Bank of England’s target, creating an added layer of complexity for her economic planning.
CPI Holds Steady at 3.8 Percent
According to the latest data, headline Consumer Price Index (CPI) inflation remained at 3.8% in August, exactly as analysts had predicted.
This steady figure likely extinguishes any hope of an interest rate cut in the near term, forcing policymakers to reconsider their options.
Core Inflation Shows Small Relief
There is, however, a sliver of positive news. Core inflation—which excludes volatile items like energy, food, alcohol, and tobacco—has eased slightly. While this may not dramatically alter the overall picture, it offers a minor reprieve in an otherwise stubbornly high inflation environment.
Productivity Downgrades Could Worsen the Situation
Adding to Reeves’ challenges are warnings that the Office for Budget Responsibility (OBR) may lower the UK’s productivity forecasts.
Economists fear that weaker output per worker could force the Chancellor to find an additional £9 billion—or potentially even more—before presenting the Budget.
Allan Monks, UK economist at JPMorgan, told the Financial Times that even a small 0.1% or 0.2% reduction in productivity could create a funding shortfall between £9 billion and £18 billion.
“We don’t know precisely what the OBR will say on productivity, but we’ve received indications there will be a downgrade,” an official added.
ONS Figures Confirm Slowing Productivity
The latest data from the Office for National Statistics (ONS) supports these concerns.
Productivity in the second quarter of 2025 was lower than the same period last year, highlighting the pressure Reeves will face in balancing public finances.
What’s Next for the Chancellor?
With inflation stubbornly high and productivity potentially downgraded, Rachel Reeves has a complex road ahead.
The upcoming Budget will need to navigate these economic headwinds carefully, balancing the pressures on public spending while trying to maintain stability in the wider economy.