UK inflation set to reach 4% next year

Consumer price inflation in the UK is set to accelerate next year, according to the National Institute of Economic and Social Research (NIESR).

The think tank said on Wednesday that it expects the UK economy to grow by 2% in 2016 before slowing to 1.4% in 2017. With the planned triggering of Article 50 in March, formally launching the Brexit process, there are downside risks to next year’s outlook, the think tank added.

Meanwhile, there are signs of “substantial impending inflationary pressure”, much of which is driven by the dramatic fall in sterling.

As this depreciation is passed through to consumer prices, NIESR expects consumer price inflation to accelerate rapidly, reaching a peak of around 4% in the second half of 2017. The think tank warned that this will impact on real disposable income.

“Households have really got a choice. Do they spend less or do they start saving less?” Dr Angus Armstrong, director of macroeconomics at NIESR, told BBC Radio 4’s Today programme.

A separate report on Wednesday showed that high-street prices have not yet started rising.

The British Retail Consortium (BRC) found that overall shop prices were down 1.7% year-on-year in October, compared with a 1.8% decline in September. This was the smallest decrease in prices since July.

Food prices in October were 1.2% lower than a year earlier, compared with a 1.3% fall in the year to September.

The BRC expects shop price deflation to move closer to zero at the turn of the year and said that it could move into inflationary territory at some point during the first half of 2017.

Helen Dickinson, BRC chief executive, said:

“While we know that the devaluation of sterling since the Brexit vote is stoking inflationary pressures, the good news for consumers is that retailers have been successful in managing this to date and there is still no impact visible in shop prices. However, it is inevitable that imported inflation will begin to make its mark and we would expect to start to see this effect coming through in the first quarter of 2017.”