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Inflation forecast to hit 4% next year

Inflation forecast to hit 4% next year

UK inflation is expected to shoot up to 4 per cent in the second half of next year, largely driven by the plummeting value of the pound. 

The National Institute for Economic and Social Research (NIESR), expects consumer price inflation to peak at 4 per cent in late 2017, a sharp jump from the most recent reading of 1 per cent.

Fund managers have largely agreed that inflation could leap as high as 5 per cent over the next year, but warned this could impact badly on real wage growth and limit consumer spending.

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Consumer price inflation has been nudging up gradually over recent months, reaching a 22-month high of 1 per cent back in September.

NIESR also warned that rising inflation could impact real disposable income, as consumer spending power takes a hit.

Simon Kirby, NIESR’s head of macroeconomic modelling and forecasting, expects the dramatic fall in sterling, which has been prompted by the UK’s vote to leave the European Union, to be the cause of a leap in consumer price inflation.

Over the past three months, sterling has hit a 31-year low against the dollar and a five-year low against the euro.

He said the depreciation of sterling has been the “most striking feature” of the post-referendum economic landscape, and suggested it will pass through into consumer prices over coming months, with inflation reaching 4 per cent by the end of next year.

But the think tank predicted that consumer price inflation will fall back to the Bank of England’s 2 per cent in 2020.

Mr Kirby said: “While we expect this to be only a temporary phenomenon, it will nonetheless weigh on the purchasing power of consumers over the next couple of years”.

Jason Hollands, managing director at Tilney Bestinvest, said he expects inflation to rise past the 2 per cent target rate during 2017, primarily as import costs rise due to the weaker pound.

"As always, inflation is an important consideration for real returns, especially at a time when interest rates and bond yields are so low.

"However, we think rising inflation off a very low floor will be a temporary phenomenon as the bigger deflationary forces emanating from huge excess capacity, especially from China, reassert their influence."

Danny Cox, chartered financial planner at Hargreaves Lansdown, said: “The bad news for savers just gets worse, as declining interest returns cannot match the rate at which prices are set to rise.

"Savers face the continuing vicious circle of eating into their capital or taking a leap up the rungs of the risk ladder in search for inflation beating returns."

He said the only cash product guaranteed to beat the rate of rising prices are NS&I Index-linked Savings Certificates.

"New issues are as rare as hen’s teeth, but if you already hold them you can roll them over at maturity for another term.”