Posted November 02, 2016 Ashley Chadwick
Inflation is set to rise as high as 4% in late 2017, according to the National Institute of Economic and Social Research. They cite weak Sterling as the main cause for this expected inflation. This will be bad news for many people as it will see real wages and wealth fall if wages fail to rise in line with inflation. Indeed, the forecast is for a fall of 0.5% real income per capita in 2017.
The NIESR, sees inflation averaging 3.5% in 2017 and 2018, comfortably above the 2% target that the Bank of England is tasked with maintaining. In fact, inflation is only seen returning to the 2% level in 2021. They also updated their forecasts for GDP growth, to 2% for 2016 and 1.4% for 2017, an increase of 0.3% since their forecasts 3 months ago.
Their forecasts were based on factors such as a 20% rise in Oil prices in 2017 from their current low levels. They also see a ‘Hard Brexit’ as the most likely scenario, where we lose access to the single market, claiming that a ‘softer’ outcome is hard to imagine at this time.
Despite these expectations, it seems unlikely that Mark Carney will change interest rates again. Initially members of the Monetary Policy Committee accepted that inflation may rise considerably above target for a while and many saw this as an indication that rates could go lower. More recently though, Carney has said that inflation cannot be too high for too long and currently no further cuts to rates are expected. However, this does not mean that they will be looking to raise rates to counter the rising inflation, as this will undermine their stimulus program, which is attempting to boost growth in the wake of the Brexit vote. The next rate change is currently seen in the second half of 2019, meaning that Carney will step down, having only changed rates once.
This report from the NIESR, comes out just two days before the Quarterly Inflation Report from the Bank of England. In which we will see their latest projections for growth, employment and inflation. It is also just a few week ahead of the Autumn budget statement from Chancellor Hammond. It is set to be a low key affair, with little changes set to be made, and Hammond has already said that he won’t be pulling any Rabbits out of his hat. He is set to do away with the rigid targets his predecessor Osborne set, instead making sure that the Government has headroom to react if needed. The Cabinet has been told to expect only a low level of fiscal stimulus announced, mainly focussed on infrastructure spending.
The Bank of England decision and QIR will be on November 3rd, and the budget statement on November 23rd.