Oxford Economics now predicts that UK CPI inflation will top 4% in the second half of 2026 before cooling in 2027.
This comes amid continued disruption in the Strait of Hormuz and significant damage to energy infrastructure across the Gulf.
Moreover, the firm expects a larger rise in inflation over the next year to result in a more pronounced slowdown in activity growth.
Oxford Economics also believes that the Bank of England will hold interest rates at their current restrictive level for the rest of this year and "well into 2027".
Edward Allenby, senior economist at Oxford Economics, commented: "Under our updated assumptions, we now anticipate a much sharper rise in petrol prices, while higher wholesale gas prices cause a 19% increase in the Ofgem energy price cap in July.
"Higher fuel and energy costs, as well as the upward pressure these will have on other prices, point to a greater squeeze on real household incomes. Therefore, we now project GDP growth of 0.4% this year and 1% next year, compared to our February baseline of 0.9% in 2026 and 1.3% in 2027, respectively."
