Given rising slack in the job market, lower headline inflation, and a smaller increase in the national living wage, our economists expect wage growth to normalize this year. Private sector regular pay growth slowed to 3.8% from around 6% over the last 12 months, and the team forecasts further cooling to 3.1% by the end of 2026.
Consumer spending in the UK is low, and the household savings rate is elevated. “Real disposable income growth is likely to remain weak in coming quarters given wage growth moderation, elevated mortgage rates, and a larger fiscal drag on household incomes,” Moberly and Stehn write.
The team’s models suggest that the savings rate will likely decline this year as interest rates fall and consumption catches up with recent increases in real inflation-adjusted incomes.
In total, our economists expect consumption to grow at 1.3% in 2026 (on a fourth quarter, year over year basis), versus 0.7% last year.
What’s the forecast for inflation in the UK?
Inflation was stronger than expected in 2025, and services inflation remained high at 4.4% in November. However, Moberly and Stehn point out that measures of underlying services inflation have made progress recently, with the sequential pace of services inflation excluding volatile items, regulated prices, rents, and package holidays dropping to 3.3%.
The team anticipates further progress on inflation in the coming months given unwinding base effects (distortions in inflation measures from comparing current readings with unusually high figures from the prior year) as well as a cut in household energy bills and the potential for weaker private rent inflation.
Goldman Sachs Research projects services inflation will slow “significantly” this year, and forecasts headline inflation to decelerate to 2.1% in the second quarter of 2026.
Source: goldmansachs.com
