OBR Opens Up Its Inflation Modelling as CPI Forecast Falls Towards 2 Per Cent Target

The OBR’s central forecast, set out in its March 2026 Economic and Fiscal Outlook, projects CPI inflation at 2.3 per cent in 2026 before reaching the Bank of England’s 2 per cent target from 2027. The figures show a sharp turnaround compared with an average of around 7.5 per cent across 2023, when inflation was running at its highest in decades. Alongside those projections, the watchdog posted to social media to flag new technical material explaining how its inflation models are structured across different time horizons.

The OBR uses separate modelling approaches depending on the forecast period — a more data-driven, sector-by-sector method for the near term, covering food, fuel, energy, housing and other consumer goods, and a more structural approach for the medium term that anchors the forecast to the 2 per cent target over its five-year horizon. The two outputs are then combined into a single forecast path.

For Kent households and businesses, the practical reach of these projections is wide. OBR CPI figures feed directly into benefit uprating — Universal Credit, State Pension and other income-related payments — as well as council funding settlements that cover services from social care to highways maintenance. Ofgem uses OBR data to estimate the average RPI-CPI wedge at 0.73 percentage points across 2026 to 2030 when setting energy price cap indexation, which flows through to household energy bills across the county. Rail fares and local authority borrowing costs are also tied to inflation indices that reference OBR assumptions.

Not everyone is satisfied with how the models work. Some economists argue that anchoring medium-term forecasts firmly to the 2 per cent target can understate the risk of persistent inflation, above all if supply-side shocks are not fully captured. If CPI does not fall as quickly as the OBR projects, spending plans and benefit uprating decisions built on those forecasts could leave households exposed.

The transparency push does have a practical upside for public bodies in Kent. Kent County Council, Medway Council and NHS Kent and Medway Integrated Care Board all rely on inflation assumptions for budgeting, contract indexation and wage planning. Greater visibility into how the OBR’s models are constructed could help those organisations stress-test their own financial plans against different inflation scenarios rather than treating the central forecast as a given.

The OBR also produces separate forecasts for RPI and the GDP deflator alongside CPI. Its long-run assumption — that CPI rises at 2.0 per cent beyond the first quarter of 2030, with RPI at 2.4 per cent — is explicitly referenced in UK government analytical work on indexation policy, underlining how far a single modelling framework shapes decisions well beyond the Treasury’s own budget arithmetic.