27/09/2025 by Tony Redondo
The OECD (Organisation for Economic Co-operation and Development) thinks the UK will be hit by the highest level of inflation of any major economy this year. The OECD expects the UK’s inflation problem to persist, ending this year at 3.5% and ending 2026 at 2.7%, a long way from the BoE’s (Bank of England’s) 2% target. It’s markedly higher than in the Eurozone, where the OECD expects inflation to end 2025 on 2.1% and 2026 on 1.9%.
It’s an uncomfortable place to be with a quarter of UK public debt index linked.
A new survey by the BRC (British Retail Consortium) suggests growing concerns about the cost of living. The survey found people’s biggest concern was “prices rising faster than wages”, with 57% of respondents agreeing (61% among working people). This was higher than concerns around tax rises (49%) and rising unemployment (26%).
The latest figures by the ONS (Office for National Statistics) show UK inflation is now at 3.8%, almost double the BoE’s 2% target. Food inflation is even higher at 5.1%, the highest level since the cost-of-living crisis in 2022/23. Retail price inflation has been rising steadily over the last year, accelerated by the impact of the 2024 Budget, which significantly increased employment costs, as well as introducing a new packaging tax on retail businesses.
The ONS has revealed that equivalised original income for UK households dropped by £1,400 in real terms because salaries did not keep up with inflation. The poorest fifth of households saw a 7.7% decrease and the richest saw a 3.4% decrease. Data also shows that 46.7% of Brits receive more in benefits than they paid in tax.
Speaking at an event hosted by the Pictet Research Institute, BoE chief economist Huw Pill said, “It’s always a question of a balance of risks. And you know, I have been on the side of saying maybe the balance of risks are more on the inflationary side than the disinflationary side. I think, through time, and also as markets reprice, that probably is changing. And personally, I’m more comfortable now than I was six, nine, 12 months ago. Although we expect inflation to return to our 2% target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully.”
It’s worth bearing in mind that the BoE’s inflation forecasts over the last decade have had significant periods of both underestimation and overestimation. Specifically, the BoE has faced criticism for failing to predict the surge in inflation from 2021 to 2023, which peaked at around 11% in late 2022. During this period, the Bank underestimated inflation in 2021 and then overestimated peak inflation in late 2022 (forecasting 13.1% when it was actually 10.8%). Earlier in the decade, there were also notable forecast inaccuracies, particularly post-2009 when quantitative easing began.
Currency Exchange Rates Update
The Pound endured a tough week in the currency markets, finished 0.2% on the week against the Euro. It has now fallen over 1.2% against the single currency in the last month and over 4.5% over the last year.
The Pound endured its sharpest two day drop against the US dollar last week since April’s tariff driven turmoil. It finished the week down 0.52%.
The UK’s slowing economy leaves the Pound vulnerable. The UK’s inflationary outlook will give the Pound some support by keeping UK interest rates higher for longer, but growth differentials remain unfavourable and long end gilt yields continue to be elevated on fiscal concerns. Adding to the pressure on the Pound, BoE Governor Andrew Bailey has signalled that UK interest rates still have “further to fall,” expressing confidence that inflation is peaking and will decline into next year. Should Bailey be proved right, the markets will adjust their expectations to price in another BoE interest rate cut this year adding to the pressure on the Pound.
This week, the key economic data releases include:
Monday EU Consumer Confidence
Tuesday UK GDP
Australia RBA (Reserve Bank of Australia) interest rate decision
Wednesday UK Nationwide House Prices & PMI Manufacturing
EU PMI Manufacturing & CPI Inflation
Thursday EU Employment
Friday US NFP Employment
What’s in the news?
Nigel Farage is on course to be Prime Minister with Reform UK the favourite to win hundreds of constituencies across the country currently held by the Tories and Labour, an in-depth YouGov survey predicts. The seat-by-seat poll suggests Reform would win 311 MPs while Labour would take 144 seats, a loss of 267 MPs. Among the big-name casualties would be current cabinet ministers Yvette Cooper, Ed Miliband, Bridget Phillipson and Lisa Nandy, as well as former Deputy Prime Minister Angela Rayner. The Liberal Democrats would have 78 seats, the Conservatives 45, the SNP 37 seats and the Greens seven. Plaid Cymru would win six, while three seats would be won by left-wing independents, the poll predicts. This would see a hung parliament with Reform UK winning 311 of the 650 seats, 15 short of an overall majority of 326.
UK
Transport Secretary Heidi Alexander approved Gatwick Airport’s £2.2bn expansion plan, allowing for an additional 100,000 flights annually. The project involves moving the emergency runway 12 metres north to accommodate narrow-bodied aircraft. Alexander described the expansion as a “no-brainer” for economic growth, with potential operations starting before 2029. The airport claims the expansion will generate £1bn in economic benefits and create 14,000 jobs.
Leading analysts Wood Mackenzie report that the North Sea could hold up to three times more oil and gas than the Government suggests, with an estimated 14 billion barrels in existing fields. This is more than three times larger than the four billion barrels estimated to remain in place by Ed Miliband’s offshore regulator.
Not so good news
Yael Selfin, Chief economist of professional services giant KPMG warned the UK economy faces two years of economic stagnation. KPMG forecast a rise of only 1.2% this year and 1.1% in 2026, significantly lower than the OBR (Office for Budget Responsibility’s) estimates. The report also predicts unemployment will reach 4.9% by 2026, up from 4.7% currently, and inflation will persist with rates expected to remain above the 2% target until late 2026.
Construction insolvencies hit a record high in August 2025. Kelly Boorman, national head of construction at RSM UK, said, “The latest insolvency figures reflect the ongoing economic pressures facing construction businesses. High interest rates at 4% and inflation at 3.8% continue to challenge firms. Labour shortages and rising costs further complicate the situation, with regulatory changes adding to compliance burdens.”
The ONS reported that government borrowing reached £18bn in August, the highest figure for five years. This figure exceeded expectations by £5.5bn and was driven by rising interest on government debt and increased spending on public services. Martin Beck, chief economist at WPI Strategy, said, “The £10bn buffer the Chancellor pencilled in against her key fiscal rule in March has almost certainly gone. That means tax rises in November look inevitable.”
The latest S&P Global ‘flash’ PMI showed business activity expectations for the year ahead slumping to a three-month low in September as firms braced for another painful Autumn Budget on 26 November. Chris Williamson, chief business economist at S&P said, “Around 50,000 job losses were signalled by the PMI in the three months to September. The latest figures bring a litany of worrying news including weakening growth, slumping overseas trade, worsening business confidence and further steep job losses. Alarm bells should be ringing that the economy is faltering”.
The CBI’s latest Industrial Trends Survey shows manufacturing output volumes falling in the three months to September, although at a slower pace than the three months to August. Manufacturers expect volumes to fall at a broadly similar pace in the three months to December.
USA
The Bureau of Economic Analysis third and final estimate showed the US economy grew faster than previously reported in the second quarter of 2025 as consumers spent more than expected on services in the three months to the end of June. The data showed US GDP grew at an annualized rate of 3.8% during the period, a significant upward revision from the advance estimate of 3% and the second estimate of 3.3%. It is also a sharp reversal from the 0.6% contraction in the first quarter when tariff front-loading had resulted in a sharp increase in imports.
Fed Chair Jerome Powell continues to strike a cautious tone, stressing that the rate cut path remains uncertain.
US oil production is on course to set a third consecutive annual record, but growth is slowing. The shale boom of the 2000s led to a resurgence of the US oil industry, and in the last 20 years it has seen accelerating growth, with the only major disruptions being the OPEC price war of 2014-2016 and the pandemic. But producers have reduced capital investment, the best drilling sites have already been developed, and labour and materials costs are up, leading to the first slowdown without an external crisis in two decades.
New testing data show the US suffering a decline in literacy and cognitive skills tied to the rise of AI and entrenched policy failures according to two prominent American commentators. Math and reading scores for high school seniors reached their lowest levels since 1992, furthering a slide that began before the pandemic. Some school curriculums now only teach passages of text, rather than whole books, according to writer Matthew Yglesias, who noted a “national collapse of interest.” AI further downgrades young people’s literacy. Derek Thompson wrote in The Argument magazine, “I am much more concerned about the decline of thinking people than I am about the rise of thinking machines.”
The EU
September’s provisional PMI Manufacturing reading came in at 49.5, undershooting forecasts of 50.7. However, strength in services more than offset the manufacturing sector weakness, lifting the composite print from 51 to 51.2. The data underscores a fragile outlook for the bloc’s manufacturing sector that remains vulnerable in a tariff-heavy global environment that continues to pressure export-driven economies like the EU.
German Ifo Business Climate Index data was weaker-than-expected with both the current conditions and expectations components falling short of forecasts.
Germany’s foreign trade surplus with the US fell to its lowest level between January and July since 2021. German businesses continue to export more goods to the US than vice versa, but the German trade surplus dropped 15% compared to the same period last year.
For the first time, the AfD leads all major German polls with a 26% share of the vote, defying bans and smear campaigns.
Credit ratings giant Fitch upgraded Italian debt to BBB+, but DBRS hit France with another ratings downgrade.
Former French President Nicolas Sarkozy was found guilty of criminal conspiracy and accepting illegal campaign money from the late Libyan dictator Muammar Gaddafi. He was acquitted of further charges of embezzlement and corruption. He is expected to appeal, meaning that any sentence will be suspended. The conviction puts Sarkozy in good company among fellow former French presidents: Jacques Chirac was found guilty of embezzlement in 2011; François Mitterrand used illegal wiretaps; François Fillon was jailed for misuse of public funds; and Sarkozy himself was previously convicted in 2021 for a separate campaign finance violation.
Others
RBA Governor Michele Bullock says that while inflation has eased significantly, prices aren’t falling, they’re just rising more slowly. She added that Australia is in a “very good” spot, with underlying inflation at 2.7%, close to the midpoint of the central bank’s 2–3% target. Bullock expects household spending to keep growing as real incomes rise, though global risks could cloud the outlook. She described employment conditions as “close to full.” However, Australia’s September flash PMI dropped to a three-month low of 52.1 as export orders fell again. Growth in activity slowed, marking a full year of expansion. Services cooled to 52, while manufacturing edged down to 51.6, with new orders falling at the fastest pace in eight months, weighed down by US tariffs. Business confidence hit a one-year low, but hiring stayed strong as firms worked through backlogs.
Restaurants Canada’s 2025 reported that cost of living increases are driving three out of four Canadians to skip eating out. This decrease in dining out results from double-digit increases in food, labour, and insurance costs squeezing restaurant margins and affordability pressures on consumers. The report highlights that 41% of restaurants operate at a loss or broke even as of June.
The New Zealand trade deficit widened significantly in August, hitting NZD 1.2 billion, well above forecasts of NZD 746 million and up from NZD 716 million in July. Exports surged 23%. Imports dipped 0.4%. Export growth was strongest to the EU (+52%) and China (+35%), while exports to Japan fell 11%. On the import side, South Korea saw the steepest decline (-32%), followed by the EU (-6%).
Russia will raise its value-added tax rate to 22%, a further indication the Ukraine war is dragging on its economy. President Vladimir Putin had pledged not to raise taxes before 2030, but spiralling military and security expenditure and reduced income from oil thanks to sanctions and Ukrainian drone attacks on refineries have hit Moscow hard. Russia’s budget deficit is expected to reach 2.6% for the full year, against an expected shortfall of 0.5%. Economic growth is also slowing, with official forecasts falling from 2.5% to 1% for this year.
Gold has hit dozens of all-time highs this year and could hit $4,000 by this year end. Gold has surged an astonishing 42% over the past 12 months.
https://www.thearmchairtrader.com/features/gold-fever-ways-to-buy-and-sell-gold-record-highs
The Production Gap Report found that instead of winding down, the 20 most polluting countries, including China, India, and the US are planning higher levels of fossil fuel output for the coming decades than they did in 2023. If current production plans hold, by 2030 the world will produce more than double the amount of fossil fuels compatible with limiting global warming to 1.5C.
Stranger than fiction
A new World Meteorological Organization report predicts that the Earth’s ozone layer is on track to fully heal by 2066, thanks to a global agreement to stop the production of CFCs (chlorofluorocarbons). In the 1980s, scientists spotted a huge hole in the layer, and at a 1987 meeting in Montreal, world nations agreed to stop using CFCs.
US Department of Agriculture figures show the world is on track for record agricultural harvests this year. Corn and wheat crops have seen large increases year-on-year, while soybean and rice yields have grown too as agricultural technology allows greater returns from the same land area.
China has more factory robots than the rest of the world combined. More than 2 million robots were working in Chinese factories in 2024, and 300,000 new ones were installed during the year; US factories added 34,000.
Quote
US President Ronald Reagan, “People who think a tax boost will cure inflation are the same ones who believe another drink will cure a hangover.”
