Vanguard economic update: Inflation remains in focus

Despite a period of lower energy prices, inflation¹ remains a key concern for central banks.

Here’s what our economists are watching across the world's major economies.

United States

Price pressures have re-emerged as an important factor in the US outlook, although the recent fall in energy prices should help reduce some of the pressure on growth and inflation. Hiring has slowed, but we continue to view the labour market as fundamentally healthy.

Key points

• We expect US economic growth of 2.3% in 2026 and 3.0% in 2027.

• Lower energy prices should help reduce some of the pressure on growth and inflation this year.

• June’s softer labour market data was in line with our expectations for a summer slowdown in hiring.

• With inflation still above target, we think the Federal Reserve (the US central bank) is most likely to keep interest rates on hold for the remainder of 2026.

United Kingdom

The Middle East conflict remains the key driver of our UK outlook because of its impact on energy prices. Growth was strong in the first quarter, but activity is expected to soften over the rest of the year as higher energy costs and interest rates weigh on demand.

Key points

• We expect UK economic growth of 1.1% in 2026 and 1.2% in 2027.

• Inflation has eased in recent months, but this masks a sharp increase in energy and food inflation linked to the Middle East conflict.

• We expect the Bank of England to raise interest rates twice this year, taking rates to 4.25% by the end of 2026.

• Slower wage growth and softer labour market conditions mean the Bank of England could raise rates by less than expected.

Euro area

The euro area outlook has improved slightly as oil prices have fallen from their recent peaks, reducing some of the risks to growth and inflation. However, weak growth data and business surveys mean a technical recession² remains possible before growth recovers later in the year.

Key points

• We expect euro area economic growth of 0.8% in 2026 and 1.3% in 2027.

• Recent indicators suggest the peak impact of the energy shock is now behind us.

• A technical recession remains possible before growth recovers later this year.

• We expect inflation to remain around current levels and end the year at 3.3%. Core inflation (excluding food and energy prices) is expected to fall to 2.2%.

• The European Central Bank raised rates to 2.25% in June, and we expect one more rise before the end of the year, which would take rates to 2.5%.

Japan

Japan’s economy has continued to recover moderately, despite some weakness linked to the Middle East conflict and higher crude oil prices. Strong corporate profits, improving household income and government support for energy costs have helped reduce the risks to growth.

Key points

• We expect Japan’s economy to grow by 0.8% in 2026 and 1.2% in 2027.

• Corporate profits remain strong, while labour market conditions and household income continue to improve.

• The Bank of Japan raised rates to 1% in June, and we expect another 0.25 percentage-point increase this year.

• The timing of any further rate rise will depend on inflation, wages, economic activity and the yen.

China

China’s economy remains uneven. Strong external demand, supported by artificial intelligence (AI) and demand linked to the green transition, is helping growth stay broadly on track, but domestic demand remains weak.

Key points

• We expect China’s economy to grow by 4.7% in 2026 and 4.8% in 2027.

• Manufacturing and export sectors continue to perform better than areas linked to domestic demand.

• Higher energy prices and supply-chain strains have put some upward pressure on producer and input prices, but this has not yet fed through strongly to consumer prices.

• Policymakers are likely to focus on speeding up existing fiscal measures, although further support could be introduced later this year if domestic demand remains weak.

All facts and figures from Vanguard analysis, July 2026.
 

¹ Inflation is the rise in prices for goods and services over time, meaning your money buys less than it used to.

² A recession is typically defined as two consecutive quarters (three-month periods) of negative economic growth.
 

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