The recent strength of inflation in the UK relative to that in the euro-zone appears to be mainly due to rises in “regulated” (i.e. government-set) prices, tax rises, and rents. These upward pressures should fade next year, and we expect the UK inflation rate to fall below 2.0% in 2027. That would close the gap with the euro-zone and underpin our view that interest rates in the UK will fall further than most expect.
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