Britain is facing a stark economic reality as inflation climbs to the highest level in the G7 and growth falters, raising fresh doubts over Labour’s promises.

The International Monetary Fund (IMF) has warned that the UK is struggling to meet its target of becoming the fastest-growing major economy, leaving Chancellor Rachel Reeves with tough decisions ahead of next month’s Budget.

Inflation Outpaces Other Major Economies

The IMF predicts UK inflation will hit 3.4 per cent this year, falling slightly to 2.5 per cent in 2026—higher than the United States, Germany, France, Italy, Canada, and Japan.

Analysts say stubborn inflation, fueled in part by tax hikes and rising costs for businesses, is making it difficult for the Bank of England to lower interest rates, putting pressure on families and firms alike.

Unemployment on the Rise

The economic picture is further clouded by a surge in unemployment, which has climbed to a four-year high of 4.8 per cent, largely affecting younger workers aged 25-34.

Meanwhile, the number of over-65s in employment has reached a record 1.7 million, highlighting contrasting trends across the workforce.

Shadow Chancellor Sir Mel Stride criticized the Labour government, saying: “Inflation is rising faster than expected due to choices Rachel Reeves has made.

Families are squeezed, debt is ballooning, and business confidence is collapsing.”

Growth Pledge Falls Short

Early in the year, the UK economy had outperformed most G7 rivals, but rising taxes—£40 billion from last October’s Budget—are biting into consumer spending and business investment.

Experts warn that without a change in policy direction, growth targets will remain out of reach.

Alex Hall-Chen from the Institute of Directors said: “The government needs a clear shift in strategy to stimulate growth and help businesses create jobs.”

Additional tax hikes, possibly reaching £30 billion, are expected as Reeves seeks to fund ambitious spending plans.

Interest Rate Constraints

High inflation is also limiting the Bank of England’s ability to cut interest rates from the current 4 per cent, frustrating millions of households hoping for relief on mortgages and loans.

Russ Mould, investment director at AJ Bell, warned: “This inflation problem could slow down both consumer and business activity, hampering growth.”

Global Comparisons

The IMF now forecasts UK economic growth of 1.3 per cent for this year and next, leaving it behind Donald Trump’s US in 2025 and both the US and Canada in 2026.

Despite this, Britain’s service-driven economy performs better than Germany, which is in recession, and France, which is barely growing.

Chancellor Reeves focused on a slight upward revision to this year’s growth forecast but largely ignored the downgrade for 2026.

She touted rising disposable incomes since the election, though analysts note surging food and energy costs are quickly eroding any gains.

Inflation Drivers and Future Outlook

The IMF attributes rising UK inflation to government-controlled regulated prices, including energy, water, rail, and postal charges.

Both headline and core inflation have surprised on the upside, though the Fund expects a gradual return to the 2 per cent target by the end of 2026 as wage growth moderates and the labour market loosens.

Budget Challenges Ahead

The latest projections underscore the challenges Reeves faces ahead of the November 26 Budget.

Early reports hint at a potential £30 billion shortfall, likely to be filled by further tax increases, adding pressure on households and businesses.

Global concerns such as Trump-era tariffs and China’s new trade barriers compound the uncertainty.

The IMF cautions that protectionist policies could hinder investment and slow growth, leaving both the UK and the broader global economy exposed to shocks.