PolicyEngine Macro
note · 25 July 2026 · inflation
CPI fell to 2.8%. The model does not think it stays there.
Inflation came in 0.12pp above the archived forecast median and inside its 68% band. The model’s central path turns higher again by Q4.
What happened
UK CPI inflation fell to 2.8% year-on-year in 2026Q2, the third consecutive quarterly fall from the 3.8% peak in 2025Q3:
| 2025Q3 | 2025Q4 | 2026Q1 | 2026Q2 |
|---|---|---|---|
| 3.8% | 3.4% | 3.1% | 2.8% |
Our published forecast, archived on 21 July from a 2026Q1 data edge, had a median of 2.68% with a 68% credible band of 2.24% to 3.16%. The outturn was 0.12pp above the median and inside the band. That is one observation and proves nothing on its own; it is recorded in the track record either way.
Why the disinflation may not continue
The same forecast round does not extrapolate the fall. Its median CPI path is roughly flat through the third quarter and then turns back up:
| Quarter | Median | 68% band |
|---|---|---|
| 2026Q3 | 2.71% | 1.95% – 3.45% |
| 2026Q4 | 3.12% | 2.09% – 4.14% |
| 2027Q1 | 3.12% | 1.88% – 4.49% |
By 2027Q1 the 68% band spans 1.9%–4.5%. Re-acceleration is the central case, not a confident call.
Growth is also expected to recover: from the 0.9% ONS outturn in 2026Q1, the model’s median path rises to 1.1% in 2026Q2 and 1.7% by Q4.
With inflation above 3% and growth recovering in the central case, renewed rate cuts would become less likely. This is interpretation, not a rate forecast: the model’s Q4 inflation band spans 2.1%–4.1%.
What would change this view
- 2026Q2 GDP, due from the ONS in August. The model's median is 1.10% year-on-year; a materially weaker print would undercut the recovery half of the story and is the single most informative release for this view.
- A downside Q3 CPI print. The model's 68% band opens at 1.95%; an outturn near that floor would make the re-acceleration look like model inertia rather than signal.
- Anything on the fiscal side. This note is a pure forecast read — no policy change is assumed. The transmission from a fiscal announcement to the rate path is not yet modelled here.
Limitations, stated
- boe-svar is a replication of Brignone and Piffer (2025), with coefficients estimated through 2025Q1. Later observations update the conditioning data, not the coefficients.
- The model forecasts CPI and GDP. It has no term structure, no exchange rate transmission channel exposed on this site, and no view on market pricing. The rate discussion above is an inference from the inflation and growth paths, not a modelled rate forecast.
- One scored forecast is not a track record. Treat the model's accuracy as unestablished and read the pseudo-out-of-sample evaluation, where it beats a drifting random walk on 4 of 8 variables at one quarter and 2 of 8 at eight.