London's Economy Today editorial - July 2026

30th July 2026 by Jubair Ahmed, Gordon Douglass, and Sixia Zhang

UK inflation drops to a recent low in June

The latest Consumer Price Index (CPI) inflation data from the Office for National Statistics (ONS) showed that CPI inflation fell to 2.6% in the 12 months to June 2026, down from 2.8% in both April and May and from 3.3% in March (Figure 1). This was the lowest rate since December 2024, apart from March 2025 when inflation was also 2.6%. CPIH inflation, a broader measure that includes owner occupiers’ housing costs, also fell, from 3.0% in May to 2.8% in June.

Line chart showing CPI, goods, services and core annual inflation rates for the UK from June 2021 to June 2026. All four measures peaked in late 2022, with goods inflation reaching almost 15%. By June 2026 CPI stood at 2.6%, with services inflation at 3.6% still above goods inflation at 1.7%. — Figure 1: CPI, goods, services and core annual inflation rates, UK, June 2021 to June 2026. Source: ONS, GLA Economics

Transport, and food and non-alcoholic beverages made the largest downward contributions to the change in annual inflation. Transport inflation slowed from 6.8% in May to 5.7% in June, largely because of lower motor fuel prices, particularly diesel. Food inflation also eased, from 2.2% to 1.7%, its lowest rate since August 2024, with prices falling across a range of food categories. Core CPI remained unchanged at 2.6%. Services inflation edged down from 3.7% to 3.6%, while goods inflation fell from 2.0% to 1.7%.

Although the June data provide clearer evidence that inflationary pressures are easing, and the government’s recently announced cost-of-living measures (discussed below) should offer some support to households and businesses, more recent developments present renewed upside risks. UK pump prices have risen sharply since mid-July, particularly for diesel, following increases in global oil prices after renewed conflict in the Middle East. If sustained, this could place upward pressure on transport inflation in the coming months. Services inflation also remains elevated, while restaurants and hotels inflation rose from 4.2% to 4.4%.

Government announces cost-of-living packages

The government has announced a package of measures aimed at easing household living costs and supporting consumer-facing businesses over the month.

VAT on domestic electricity in Great Britain will be cut from 5% to zero for six months (October 2026 to March 2027), at a cost of around £850 million, funded by cancelling the digital ID programme. HM Treasury expects it to “take around £45 off the yearly Ofgem price cap in October” and lower CPI inflation by 0.1 percentage points.
Business rates will also be cut by 20% for around 32,000 pubs, clubs and smaller live music venues from April 2027, saving a typical pub an estimated £1,100 in that financial year – and impacting roughly 3,600 pubs and bars in London. This comes on top of existing support for pubs and live music venues and the permanently lower business rates multipliers introduced for retail, hospitality and leisure properties.
A £2 cap on single bus fares in England (excluding London) will also run through 2027, costing £400 million and reinstating a cap that last applied in 2024. Fares are capped locally in London; the Mayor’s July fares decision holds the adult single bus and tram fare at £1.75 until 1 November, when it rises to £1.85.
The temporary Great British Summer Savings scheme reduces VAT from 20% to 5% between 25 June and 1 September 2026 on eligible children’s meals, family entertainment tickets and admission to attractions.

For London, then, the package offers a modest and time-limited cut in electricity costs, no benefit from the bus fare cap, and nothing that touches water bills.

Analysis recently published by the Consumer Council for Water found that in 2024/25, the Thames Water region, which serves most of London, had the highest rate of water poverty of any of all English and Welsh regions: 10.5% of households spent more than 5% of their income after housing costs on water, against 6.8% nationally. The Consumer Council also found that just 48% of the company’s customers considered their charges affordable in 2025 – the lowest share of any water and sewerage company. Although water bills are rising far slower than last year (Thames Water’s “typical” annual bill rose 3.4% on the year), this follows a 31% jump in April 2025, when Ofwat front-loaded much of Thames Water’s 2025-30 settlement. As a result, the average Thames Water bill is around a third higher compared to two years ago.

UK GDP continues to increase

The ONS also published data on UK GDP this month. This showed that the UK economy grew in May. Output increased by 0.7% in the three months to May 2026 after growing by an upwardly revised 0.8% in the three months to April (Figure 2). This was the sixth month in a row which has seen the UK economy expand.

Combined bar and line chart showing UK real three-month GDP growth from May 2025 to May 2026, with bars splitting the contribution of services, production and construction. Growth dipped to around minus 0.1% in October and November 2025, then climbed steadily to 0.8% in April 2026 and 0.7% in May 2026, driven mainly by services. — Figure 2: UK real three-month GDP growth, May 2025 to May 2026. Source: ONS

On a monthly basis GDP also grew by 0.1% after falling by 0.1% in April. This growth was the average of expectations of polled economists. Looking at the three-monthly data in more detail the ONS observes that the services sector, an important sector for London, grew by 0.7% in the three months to May after growing by 0.9% in the three months to April. The production and construction sectors also saw growth over the three months by 0.1% and 1.6% respectively. Compared to the three months to May 2025, GDP is estimated to be 1.1% higher in the three months to May 2026.

IMF raises its UK growth forecast, although the energy shock is expected to slow the recovery

The IMF’s July 2026 World Economic Outlook Update forecasts UK GDP growth of 1.0% in 2026, followed by 1.3% in 2027. The forecast for 2026 has been revised up from 0.8% in the IMF’s April outlook, reflecting stronger-than-expected economic activity before the latest escalation of the conflict in the Middle East.

The IMF’s subsequent 2026 Article IV assessment provides further detail on the UK outlook. It reports that the economy had been gaining momentum before the war, with growth picking up to 1.4% in 2025 as private consumption and investment recovered. Inflationary pressures were also easing, with core inflation falling and wage growth moderating, allowing the Bank of England to reduce the Bank Rate gradually to 3.75% by February 2026.

However, the recent energy shock is expected to interrupt this improvement. Higher energy prices are likely to reduce households’ real incomes and raise production costs, while tighter financial conditions and elevated uncertainty weigh on consumption and investment. Growth is therefore expected to slow to 1.0% in 2026 before recovering to 1.3% in 2027 as the effects of the shock gradually dissipate.

The IMF forecasts headline inflation to rise above 3.5% towards the end of 2026, before returning to the Bank of England’s 2% target by the end of 2027. The pass-through to core inflation is expected to be more limited, reflecting weaker labour market conditions, slower wage growth and a negative output gap. The unemployment rate is forecast to rise from 4.9% in 2025 to 5.6% in 2026, before gradually falling to 5.3% in 2027 and 4.8% in 2028.

Monetary policy is also expected to ease gradually as inflationary pressures subside. The annual average Bank Rate is projected to fall from 4.3% in 2025 to 3.8% in 2026, 3.2% in 2027 and 3.0% from 2028 onwards. However, the IMF argues that policy should remain sufficiently restrictive in the near term to prevent higher energy prices from feeding into wages and underlying inflation.

New Prime Minister launches devolution drive, but the fiscal detail awaits the autumn Budget

The new Prime Minister has made the devolution of power away from Whitehall a flagship policy, saying in his first speech that “the days of Whitehall resisting devolution are over, for good”. On 24 July he formally opened “No 10 North” in Manchester, a second Prime Minister’s office, described as “the nerve centre of a rewired Britain”. The new office sits within an Office for the Prime Minister and the Cabinet, which holds responsibility for devolution strategy moving out of the Ministry of Housing, Communities and Local Government, and for local economic growth strategy out of HM Treasury. A revived National Economic Council, on which regional mayors will be invited to sit, will be chaired from the Manchester office and met for the inaugural sitting on 23 and 24 July.

The decisions most consequential for London are still being scoped. A Treasury “fiscal devolution roadmap”, due alongside the autumn Budget, will set out which tax revenues could be devolved to regional mayors, and press reports suggest this could include giving mayoral authorities a share of income tax revenue. Analysis published in July by Centre for Cities notes that only 32% of the GLA’s revenue funding comes from taxes, the smallest share of any G7 primary city, so movement here could be significant for the capital’s spending powers. Business rates are already partly devolved, but the GLA retains only 37% of those collected in London, and only temporarily, between periodic resets. The Mayor has previously called for London to keep all growth in business rates revenue, the arrangement Greater Manchester and the West Midlands secured for ten years in their 2023 trailblazer deals, and one the London Assembly has backed.

Improving growth in London’s economy forecast for the coming years

Twice a year, GLA Economics produces medium-term forecasts of key macroeconomic variables:

London’s output (real Gross Value Added)
Employment levels (total Workforce Jobs)
Household income (real Household Disposable Income)
Household expenditure (real Household Expenditure)

These forecasts are used in various internal business planning processes and are presented as central, upside, and downside scenarios and a new forecast has been published this month. Key findings from it include:

Annual output growth is forecast to continue at a moderate pace over the medium term, rising from 1.4% in 2025, 1.7% in 2026, 2.0% in 2027 and 2.1% in 2028. This reflects modest growth which is held back by elevated global uncertainty, with the inflationary impact of the Iran conflict and the closure of the Strait of Hormuz feeding into the later quarters of 2026, before a mild recovery towards growth rates more normal for the capital. London’s projected growth remains of a larger magnitude than that forecast for the UK as a whole, consistent with the capital’s more service-oriented, export-facing economy.
Workforce jobs is forecast to return to growth at a moderate pace over the medium term, rising by 0.5% in 2026, 0.8% in 2027 and 1.0% in 2028. However, this is more cautious than many external forecasts, with independent forecasters averaging 0.6% in 2026, 1.0% in 2027 and 1.3% in 2028.
Household income is forecast to be moderate over the medium term, growing by 1.2% in 2026, 1.3% in 2027 and 1.5% in 2028. Inflation, driven by the commodity-price shock from the Iran conflict, is expected to squeeze Londoners’ real disposable incomes over the near term, with the pressure falling most heavily on lower-income households.
Household spending is forecast to continue gradual growth, at 1.0% in 2026, 1.2% in 2027 and 1.4% in 2028.

Our central scenario assumes no structural shocks, but three risks warrant monitoring. International risks from the disruption caused by the ongoing war in the Middle East as well as collapsing trade growth and tariff escalation could hit London’s globally exposed sectors. Fiscal uncertainty may weigh on business confidence and investment. And while AI adoption offers productivity gains for London’s tech-heavy economy, displacement in exposed roles has already begun while some commentators have warned about how stretched AI-linked equity valuations may be.

GLA Economics will continue to monitor these (and other) aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.