UK inflation to peak at 4% next year, says think-tank

Added 2nd November 2016

Brexit-fuelled sterling weakness will push consumer price inflation toward 4% in the middle of next year, the National Institute of Economic and Social Research said on Wednesday.

UK inflation to peak at 4% next year, says think-tank

In its latest economic review, the institute said it expects the UK economy to grow at 2% this year, before seeing a slowdown to 1.4% in 2017. Despite this slowing growth path, however, the institute said there are signs of “substantial impending inflationary pressure” which will see inflation only returning to the Bank of England’s 2% target in 2020.

“This outlook of weak demand and above target inflation presents a trade-off for monetary policy. We expect the Bank of England to look through the near-term inflation increase and hold the stance of policy constant until the second half of 2019. After this point, Bank Rate is expected to tighten gradually, reaching just 1¾ per cent by the end of our forecast horizon,” the institute said.

Simon Kirby, head of macroeconomic modelling and forecasting at NIESR said: “The positive outturns for GDP growth in the near term are very welcome, but these give little to no guidance as to what will be the long run impact from leaving the EU will be. The depreciation of sterling has been the most striking feature of the post-referendum economic landscape. This will pass through into consumer prices over the coming months and quarters."

The institute was, however, positive on the measures announced by the BoE in August, saying that the interest rate cut and the increase in its quantitative easing programme could add as much as two thirds of a percent to the level of GDP.

“We also find that they will have a notable impact on the public finances, improving them by around £4bn ($4.9bn, €4.4bn) per annum over the next five years."

It did suggest though, that the slowdown in activity, especially when coupled with the uncertainty engendered by the Brexit negotiations could see firms delay hiring plans that would in turn push unemployment as high as 5.6% in 2017, before returning gradually to its long-run level. 

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Geoff Candy

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Geoff Candy joined Portfolio Adviser as News Editor in May 2014. He has been a financial journalist and broadcaster since 2005 and, in that time has worked in both South Africa and the Netherlands, covering everything from high street retailers and construction companies to mining and insurance.

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