UK–eurozone inflation gap to shrink, Fitch forecasts

UK headline inflation may gradually align with eurozone levels, ending the unusual divergence that has persisted through 2025, according to Fitch Ratings. The easing of both headline and core inflation underpins the agency’s view that the Bank of England (BoE) will cut rates once more by year-end, followed by a further 50 basis points of easing in 2026.

UK headline CPI climbed by 1.3 percentage points (pp) this year to 3.8 per cent in September, while eurozone HICP has held near 2 per cent. Fitch attributes around half of this gap to energy costs.

UK electricity and gas inflation is currently above 9 per cent year on year (YoY), up sharply from minus 6.8 per cent in December 2024, largely due to Ofgem’s price-cap adjustments tied to wholesale gas prices. The divergence is expected to narrow as the October UK price-cap increase was limited to 2 per cent, compared with a 9.5 per cent rise in October 2024, Fitch said in a release.

“The combination of stubbornly high wage growth, alongside rising consumer inflation expectations, has left the Bank of England searching for the ECB’s ‘good place’. But we think that the weakening in the UK labour market means that wages and price inflation are now firmly on the way back down. We are sticking to our forecast for Bank Rate to fall to 3.75 per cent by year-end and to 3.25 per cent by end-2026,” said Jessica Hinds, director at Fitch Ratings.

UK headline inflation is expected to move closer to eurozone levels, with easing price pressures supporting Fitch Ratings’ view of one more BoE rate cut this year and further easing in 2026.
The CPI’s rise to 3.8 per cent and high energy inflation explain much of the gap.
Fitch says a softening labour market will pull wages and inflation lower, enabling rates to fall to 3.25 per cent by end of 2026.

Fibre2Fashion News Desk (HU)