After years of overshooting that target, hopes had been rising that 2026 might finally be the year the headline figure settled close to it.
That now looks unlikely. With inflation running at 3 per cent in April and the Bank itself projecting it to climb further throughout the year, businesses face the prospect of higher costs, tighter consumer spending, and interest rates that may stay elevated for longer than many had planned.
Why two per cent matters
The two per cent target is set by the Government and given to the Bank of England to deliver, which it attempts to do by setting the Bank rate of interest.
Whilst it may seem like an arbitrary figure, it is seen as a low, stable rate of inflation that gives businesses and households the confidence to plan, borrow and invest, knowing that the value of money will not shift dramatically from one year to the next.
When inflation runs persistently above target, the Bank typically responds by keeping interest rates higher.
That is the lever it has, and it is the lever it is currently choosing to hold steady, with the base rate left at 3.75 per cent in April and unlikely to fall further this year, according to many economists, with some anticipating a rise.
For businesses, that combination of higher prices and higher borrowing costs is the real-life squeeze that many companies are experiencing, which may be part of the reason that insolvencies, redundancies and unemployment have been on the rise in recent months.
A short-lived bounce in growth
The picture is complicated by recent figures showing the UK economy, as measured by Gross Domestic Product (GDP), is growing more quickly than expected at the start of the year.
On the surface, that is certainly welcome news for businesses that were expecting a harder hit as a result of the disruption caused by the conflicts in Iran and Ukraine.
However, beneath the surface, most economists agree the uptick is unlikely to last.
Energy prices are climbing again, in part due to disruption to global supply, with households recently being advised that the Ofgem price cap will increase by 13% in July.
The labour market is also cooling and the tax rises announced in previous Budgets are still working their way through the system.
The OECD has cut its UK growth forecast for 2026 from 1.2 per cent to 0.7 per cent and raised its inflation forecast for the same year from 2.5 per cent to 4.0 per cent.
That is a significant shift in a short space of time, but it captures the direction of travel.
What inflationary pressure looks like on the ground
For most businesses, the headline CPI figure is a poor proxy for what is actually happening to their cost base.
The pressures show up in more specific ways:
- Input costs are rising, particularly for energy-intensive items, imports and road transport.
- Wage demands from staff trying to protect their real income are growing, especially where service inflation remains sticky.
- Suppliers are passing on their own increases, often with little notice and limited room to negotiate.
- Higher borrowing costs on overdrafts, asset finance and commercial loans will eat into margins before a single sale is made.
- Customers are becoming more cautious, with consumer spending growth forecast to remain below one per cent.
Few businesses will feel all of these at once, but most will feel at least two or three. The combination is what makes the current environment difficult to manage, particularly for those operating on thin margins or with significant debt.
What businesses can do now
There is no single response to an inflation backdrop that refuses to settle. However, here are some practical steps that tend to make a difference:
- Review your pricing – If your costs have moved and your prices have not, your margin is absorbing the costs. Small, regular adjustments are usually easier for customers to accept than one large jump.
- Look hard at your cost base – Energy contracts, supplier terms, finance arrangements and even insurance renewals are all worth a fresh look. Switching providers or renegotiating terms can release cash that protects the rest of the business.
- Stress-test your borrowing – If the Bank of England keeps rates higher for longer, the cost of any variable-rate debt will stay with you. Knowing what your repayments look like under different scenarios is far more useful than hoping for cuts that may not come.
- Watch your cash flow – In a high-inflation, low-growth environment, the businesses that get into trouble are rarely the ones that are unprofitable on paper. They are the ones who run out of cash.
- Make better use of tax reliefs – Allowable expenses, capital allowances, R&D claims and the timing of investment decisions all matter more when margins are tight.
The bigger picture
The two per cent target is not gone, but it has slipped further out of reach. That does not mean every business will struggle.
However, it does mean that previous assumptions used to plan the next twelve to eighteen months need to be tested rather than borrowed from the last set of forecasts.
