What is the current situation
Before we examine strategy, it’s important to set out where things stand:
- UK inflation has come down from very high levels (2022-23), but remains above target. (GOV.UK)
- The Bank of England (BoE) target for CPI inflation is ~2%. Estimates suggest inflation may return gradually toward that number over the next 1-2 years. (GOV.UK)
- Growth is modest and forecast to remain so; there are headwinds from higher labour costs, global uncertainty, energy and import‐price pressures, etc. (CBI)
What is Labour / Rachel Reeves proposing (or doing) to tackle inflation
Rachel Reeves, as Chancellor, has introduced or signalled a number of policies and strategic priorities which could affect inflation, either directly or indirectly. Key among them:
- Fiscal discipline and tightening
- Reeves aims to rebuild the UK’s fiscal headroom, meaning surplus in day-to-day (or current) spending vs revenue, and reducing borrowing. (The Standard)
- The Spring Statement 2025 included savings/benefit reforms: for example, cutting/welfare reforms, freezing certain benefit elements for new claimants. (Upday News)
- Government day-to-day spending growth is being restrained, though capital spending (investment) is being protected to some degree. (Upday News)
- Tax reform / raising revenue (in non-traditional ways, constrained by manifesto pledges)
- Reeves has ruled out raising income tax, VAT, or national insurance taxes on individuals (working people) but is exploring other taxes or reforms: wealth taxes, capital gains tax, property related taxes, “windfall” taxes on energy profits, etc. (The Guardian)
- Proposals to reform business rates, council tax, stamp duty are under consideration. (The Times)
- Monetary policy (indirect, but relevant via Bank of England)
- While Reeves does not set interest rates, her fiscal policy (borrowing, deficits) affects inflation expectations, government bond yields, and the room BoE has to manoeuvre. Keeping budgets more disciplined helps support confidence in monetary policy.
- Observers expect a series of interest rate cuts (or at least easing) once inflation shows marked decline and other conditions allow. Forecasts from KPMG, CBI etc. show inflation gradually falling toward target over 2025-2026. (KPMG)
- Supply-side and investment measures
- Reeves has emphasised a focus on investment through the National Wealth Fund to catalyze private sector investment, infrastructure (energy, transport, technology), planning reforms, etc. (CNBC)
- There are also incremental adjustments in wages (minimum wage increase) and support to households, but these need balancing so as not to fuel inflation. (Tees Law)
Inflation forecasts under current strategy
Here are some of the official / semi-official projections:
Forecast Source | CPI Inflation Estimate / Key Notes |
---|---|
Office for Budget Responsibility (OBR): Spring Statement 2025 | Predicts CPI inflation averaging ~ 3.2% in 2025, then falling to 2.1% in 2026, reaching ~2% in subsequent years. (GOV.UK) |
CBI / British Chambers / KPMG | Similar forecasts: inflation remains above 3% through 2025, then easing toward ~2-2.5% in 2026, assuming energy/imports costs ease and labour costs settle. (CBI) |
These suggest that under current plans, inflation is unlikely to be fully “stabilized” at 2% before 2026, but could be moving significantly toward that target in 2025-’26.
Constraints, challenges & risks
For Reeves to succeed in stabilizing inflation by 2026, there are several significant headwinds and risks:
- External shocks
- Global energy prices: spikes in oil, gas, or other commodities can push inflation up even if domestic policies are tight.
- Supply chain disruptions, geopolitical instability.
- Import price inflation, exchange rate movements: a weaker pound makes imported goods more expensive.
- Labour market tightness & wage pressures
- If wages keep rising rapidly (due to low unemployment or strong bargaining power) and productivity does not keep up, that can feed inflation. Reeves’ government needs to balance supporting incomes vs not allowing wage growth to overshoot productivity gains.
- Inflation expectations
- If people and firms expect inflation to stay high, they’ll behave accordingly (price settings, wage demands), which makes bringing inflation down harder. Credible policy (monetary & fiscal) is needed.
- Fiscal constraints / political constraints
- Reeves has made manifesto pledges (not increasing certain taxes). That limits what tools are “on the table.” Deviating may have political cost.
- Cutting public spending or welfare can be unpopular; raising taxes (especially wealth taxes, etc.) may face resistance.
- Monetary policy lag
- The BoE’s interest rate increases or cuts affect inflation with a lag. Even with tight policy, there is inertia; prices, contracts, expectations don’t adjust instantly.
- Structural issues / supply side weaknesses
- Productivity growth in the UK has been weak. If productivity doesn’t improve, costs per unit of output stay high, feeding inflation.
- Housing, energy infrastructure, logistics, planning bottlenecks: if constrained, they can add to domestic cost pressures.
Can she stabilize inflation before 2026? My assessment
Pulling together the evidence, here is how plausible various scenarios are:
Scenario | Likelihood | What it would require / what would go wrong |
---|---|---|
Inflation near 2% by early-to-mid 2026 | Moderate to low | Requires favourable external conditions (energy, global supply), maintained fiscal discipline, no large shocks, wages growth contained, productivity improvements. Also requires BoE to maintain restrictive monetary settings until inflation is visibly falling. |
Inflation falling significantly but still above 2% in 2026 (e.g. ~2.5-3%) | Quite likely | Even with some slippage, many forecasts point to this. Domestic policies and external easing should push inflation down. |
Inflation stuck higher or volatile | Possible risk | If there are adverse external shocks (energy price spikes, currency depreciation), or if fiscal loosening or wage pressures slacken discipline. Also if tax hikes or spending cuts undermine growth, causing supply-shocks or inflation expectations to remain sticky. |
So, stabilizing inflation before 2026 (say by late 2025) seems unlikely; stabilizing it around 2-2.5% sometime in 2026 is more plausible under current strategy plus benign external factors.
Which policy levers are most important
From what Labour/Reeves is doing (or could do), these levers seem most critical for success:
- Tight fiscal policy: controlling public spending, avoiding big deficits, building buffer.
- Tax reform targeting non-distorting/revenue-raising taxes (wealth, property, capital gains) rather than increasing taxes that harm work incentives.
- Containing wage growth via improved productivity, perhaps via investment in infrastructure, innovation, skills, etc.
- Ensuring the BoE’s monetary policy stays credible and tight if required; supporting its independence.
- Mitigating external cost pressures: energy policy, import sources, exchange rate stability.
- Here are several case studies — from the UK and elsewhere — that are relevant to assessing Labour / Rachel Reeves’s ability to stabilize inflation before 2026. These show what can work (and what pitfalls to avoid). After the case studies I’ll draw lessons for the present.
Case Studies of Inflation Stabilization
1. UK: The Inflation-Targeting Regime (Post-1992)
What happened
- In 1992, following Black Wednesday, the UK formally adopted inflation targeting, giving the Bank of England operational independence and a mandate to aim for a ~2-3% inflation target. (Bank of England)
- Over the following decade and more, inflation became more stable; inflation expectations became better anchored; the volatility of inflation fell. (Bank of England)
Key Policies / Mechanisms
- Strong and credible monetary policy: interest rates, forward guidance.
- Fiscal discipline: avoiding large deficits that could fuel inflation expectations.
- Transparency and clear communication from the Bank of England, so markets, firms, and households understood what to expect.
Results / Timescale
- Inflation did not immediately hit target every year, but there was a steady downward trend and less inflation persistence. It took multiple years.
- After external shocks (e.g. oil price spikes), the Bank often had to tighten. But overall, the framework gave better stability.
Relevance / Lessons
- Having a credible, independent central bank with inflation targeting helps anchor expectations. Reeves cannot control interest rates but needs to ensure fiscal policy supports the credibility of monetary policy.
- Stabilization tends not to happen overnight — often requires several years and favorable external conditions.
2. UK: 1970s to early 1980s – Inflation & Stabilization under Thatcher
What happened
- The UK in the 1970s faced very high inflation (double digits), due to oil shocks, wage-price spirals, weak monetary discipline.
- In the late 1970s / early 1980s under Margaret Thatcher and her Chancellor (Gordon Brown later, etc.), policy shifted toward tighter monetary policy, control of the money supply, high interest rates, and fiscal restraint.
Key Policies / Mechanisms
- Tight monetary policy, even at the cost of high interest rates and recession.
- Reducing the role of unions / reducing the extent of wage indexation.
- Fiscal discipline (or at least reducing some of the excessive public spending).
Results / Timescale
- Inflation eventually dropped from very high levels (e.g. over 20%) down toward single digits and eventually very low levels.
- But the cost was high: deep recessions, unemployment rose sharply. The process took multiple years, and was painful.
Lessons
- Taming entrenched inflation often requires tough choices — restricting demand, sometimes accepting short-term pain.
- Wage pressures are crucial: if wages keep rising without matching productivity, inflation keeps feeding through.
- External environment matters (e.g. oil prices, currency strength), and domestic conditions (labour market, productivity) play big roles.
3. Other Countries: Israel, Brazil, New Zealand
To broaden the perspective, here are a few other cases where governments (or central banks) managed to bring inflation under control.
New Zealand (1980s)
- In the 1980s, New Zealand underwent radical reforms: liberalizing the economy, reducing subsidies, controlling public spending, floating the currency, and giving the central bank strong independence.
- Inflation, which had been high, was brought down significantly over several years.
Lessons: structural reforms, credible monetary policy, and addressing both demand and supply side issues matter.
Brazil (1990s Plano Real)
- Brazil faced hyperinflation in late 1980s/early 1990s. The “Plano Real” (Real Plan) introduced a stabilisation currency (Real), fiscal reforms, tighter monetary policy, and later some inflation targeting mechanisms.
- It succeeded in stabilizing inflation from hyperinflation rates into much lower, manageable levels.
Lessons: fiscal discipline, currency credibility, sometimes changing the monetary anchor (exchange rate or currency reform) can help; but it must be comprehensive.
Applying These Lessons: Can Reeves Stabilize Inflation Before 2026?
Looking at these case studies, and comparing with Labour’s strategy and the current UK context, here are how things line up, and what’s possible.
Preconditions for Success
These are what need to go well for inflation to be stabilized (near target) within the timeframe (before or in 2026).
Preconditions Status / How likely in UK now Credible monetary policy (strong, independent BoE; no fiscal undermining) BoE remains independent. But government fiscal policy needs to avoid signals that weaken BoE’s credibility (e.g. big unexpected spending, or policies that look inflationary). Fiscal discipline Reeves is signaling this: controlling day-to-day spending, avoiding raising certain taxes, but planning revenue reforms. However, there is risk with business taxes, benefit reforms etc. Need to maintain restraint. Wage growth matched by productivity This is a challenge: UK’s productivity growth has been weak. If wages rise faster than productivity (which is likely with inflation and tight labour markets), risk of wage-price spiral. External environment favourable Energy prices, global supply chains, exchange rates: many moving parts. A spike in energy or import costs, or currency weakness, could disrupt progress. Time Case studies show stabilisation often takes multiple years. Before 2026 gives maybe 1-2 years; tight margin for success.
Possible Scenarios
Here are plausible scenarios with respect to stabilizing inflation, inspired by the case studies:
Scenario What needs to happen Likely outcome by 2026 Best-case RoE: External cost pressures fall (energy, import costs drop), fiscal discipline is maintained, wage growth is moderate, BoE remains restrictive as needed, some supply-side improvements (productivity, investment) show some traction. Inflation could be brought down to ~2-2.5% by mid-2026; possibly close to target but still some risk of overshoot in specific categories (food, energy). Moderate case Some external pressures remain, some slip in fiscal discipline (e.g. business tax hikes feeding through), wage growth above productivity, supply constraints persist. Inflation drops significantly from current levels, maybe ~3-4% by end 2025 / early 2026; not fully “stable” at target, but moving in right direction. Worst-case / risk Major external shocks (energy spike, global inflation resurgence), fiscal loosening (unexpected spending or tax cuts undermining discipline), wage demands surge without productivity, BoE forced to choose between inflation and growth badly. Inflation remains elevated above target through 2026, maybe stuck around 4-5% in some measures; risk of inflation expectations becoming unanchored (making it harder to reduce further).
How Likely is It Before 2026?
Putting all this together, my view is:
- Stabilizing inflation fully at or close to 2% by before 2026 looks difficult, though not impossible if many things go well.
- More likely is that inflation will continue to fall, but remain somewhat above target through most of 2025, only perhaps approaching near target in late 2025 or into 2026.
- Key risk: if policies intended to raise revenue or support households send price signals (taxes, regulatory costs) that feed through to inflation.