Inflation will surge to 4% next year and remain above the Bank of England’s target until at least 2020, according to one economic think tank’s latest prediction.
The National Institute of Economic and Social Research (NIESR) today said it expects the Consumer Price Index (CPI) rate of inflation to “accelerate rapidly” as retailers and manufacturers pass on higher import costs to consumers. The pound is currently at a 31-year low against the dollar, and a five-year low against the euro, which has also slumped against international currencies since June.
Simon Kirby, head of macroeconomic forecasting at NIESR says: “By the end of 2017 we expect consumer price inflation to have reached almost 4%. 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.”
The prospect of sustained 2%+ inflation will eat into savings in real terms. Just one five-year fixed rate savings account currently beats 2% interest, paying 2.01%. Most instant access accounts don’t even pay 1%.
“More than ever, people must now take a hard look at how they are managing their money and explore alternatives to cash savings that can help them beat low interest rates and inflation, and make their money work for them,” says Dr Richard Theo, chief executive of robo-adviser Wealthify.
Short-term boost to economic growth
The weaker pound will drive inflation and put household budgets under pressure but it is likely to provide a short term boost to the economy as our exports become cheaper. NIESR expects the UK economy to grow 2% this year, though it still expects the economy to slow over the medium term, with potential for further shocks as the UK starts a messy divorce process from the EU next year.
Mr Kirby adds: “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.”
Worse yet, the uncertainty of Brexit could put UK companies off making hiring decisions, so unemployment could rise to 5.6%, which could expose households with a savings shortfall. Dr Theo says the typical household only has savings worth four weeks’ salary.
The Bank of England’s next quarterly inflation report is due out tomorrow. As of August, the Bank anticipated inflation could rise to 2.4%, though tomorrow’s forecasts are likely to be higher still.