Vanguard’s economic update: Higher energy prices keep inflation elevated

Economic growth remains resilient in several major economies. But higher energy prices are adding to inflation¹ pressures and could lead to further interest rate rises.

Here’s what our economists are focusing on in the world’s major economies.

United States

Economic growth remains resilient, supported by strong business investment and consumer spending. The jobs market is stable but hiring is subdued, while inflation risks have increased as energy prices rise. 

Key points

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

• Business investment remains strong, while tax changes and higher household wealth support consumer spending.

• The jobs market is stable, despite weak hiring.

• We expect one more interest rate rise this year, to 4.1%.

United Kingdom

Economic growth has been stronger than expected. Higher energy prices and persistently high core inflation (which excludes volatile items such as food and energy) support the case for the Bank of England (BoE) to raise interest rates.

Key points

• Growth has been stronger than expected and could exceed our 1.1% forecast for 2026.

• We expect unemployment to rise to around 5.3% by year-end, partly due to higher employer National Insurance costs.

• We see core inflation remaining around 2.6% through to the end of 2027, which is above the BoE’s 2% target.

• The BoE is likely to raise rates once more in 2026, to 4.0%, and again in 2027, to 4.25%.

Euro area

Economic activity remains resilient despite higher energy prices, although increased German government spending has yet to provide much of a boost to industry. Renewed inflation pressures could lead to further interest rate rises.

Key points

• Growth has been stronger than our 0.8% forecast for 2026. We expect growth of 1.3% in 2027.

• Higher energy prices are adding to inflation pressures.

• Core inflation is expected to remain around 2.5% through 2027.

• We expect two more rate rises: one this year, to 2.75%, and another in early 2027 to 3.0%.

Japan

Japan’s economy remains resilient, helped by exports, business investment and rising wages. Businesses are increasingly passing higher costs on to consumers, adding to inflation pressures and making another interest rate rise more likely.

Key points

• We expect growth of 0.8% in 2026 and 1.2% in 2027.

• Exports remain strong, helped by global investment in artificial intelligence (AI).

• Rising wages are supporting household spending.

• We expect the Bank of Japan to raise interest rates to 1.5% in December or January.

China

Exports, helped by demand for AI-related goods, continue to support China’s economy, but weak consumer spending and the property downturn are a constraint. The government is taking steps to support growth, although the impact may be limited.

Key points

• We expect growth of 4.7% in 2026 and 4.8% in 2027.

• Exports remain strong, but trade tensions and potentially slower AI investment pose risks.

• The property market remains weak.

• Central bank support is expected to continue, but near-term rate cuts look less likely.

All facts and figures from Vanguard analysis, October 2026.

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

Investment risk information

Investing gives your money the opportunity to grow over time, but market movements mean values can rise and fall along the way.

Important information

Vanguard only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product(s) described, please contact your financial adviser.

This is designed for use by, and is directed only at, persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2026 Vanguard Asset Management Limited. All rights reserved.

6060558