The Office for Budget Responsibility’s predictions for inflation next year are “unrealistic”, a senior european economist at Schroders has said.
In a media briefing today (October 28), Azad Zangana said the OBR had failed to predict how and when inflation would fall next year once it peaks.
In its latest economic and fiscal outlook released yesterday (October 28), the OBR said it expects inflation to reach 4.4 per cent next year, and added since the forecast has closed it thought it might peak at close to 5 per cent.
However, it added this near-term spike in inflation was expected to be “relatively short-lived" and that inflation would return to the 2 per cent target in 2024, "as energy prices stabilise, supply bottlenecks ease, and a modest tightening in monetary policy counteracts the extra stimulus from the fiscal package".
Zangana said: “The fall back down in inflation wasn't really picked up on by the OBR, they sort of have a spike up and then it kind of magically comes down to about 2 per cent, which is pretty unrealistic," he said.
"In reality, this spike up, and we're going to see this next year, is going to cause negative base effects.
"And therefore we'll see a spike down in the following April 2023, and at that point we could even see inflation below zero."
Zangana said Schroders’ view was that inflation was going to go higher than both the Bank of England and the Treasury have warned.
“We think inflation could peak over 5.5 per cent next year before coming down,” he said, adding this would have a knock-on impact on households.
“In our view, this is all very temporary, but it's still going to hurt. A lot of households are really going to struggle through this period.
“The savings rate for households has been built up quite nicely, and that will help I think, to draw down on these savings.
“But it's still going to be a pretty difficult period.”
The governor of the Bank of England has hinted twice that interest rates may be raised in the coming months.
Speaking to the G30 Annual Banking Seminar on October 17, Andrew Bailey said the BoE will “have to act” on inflation, after telling the Society of Professional Economists a month earlier that the base rate of interest might be hiked before the end of the year.
The next monetary policy committee meeting, where interest rates are decided, is on November 4.