UK inflation could climb above 4% this year, warns thinktank

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UK inflation could climb above 4% this year, warns thinktank


The government is expected to prepare for higher inflation this year that will eat away at household living standards and push more low-income families into poverty, according to the Resolution Foundation.

Inflation is set to surpass 4% in the coming months as the economy opens up and consumers start spending some of the savings they’ve accumulated over the past 16 months, according to the think tank. The price hike will cut average household incomes by £ 700 by the start of next year, with low-income families among the hardest hit, he predicts.

While ministers also plan to roll back a £ 20-a-week increase in universal credit, which was introduced last April, the foundation says there is the prospect of an even greater increase in poverty without government action. government.

About 6 million people applied for universal credit last month, up almost 100% from the pre-pandemic total and before the first lockdown triggered a wave of layoffs and short-time working. The reduction of £ 20 per week is expected to take effect in the fall.

Figures from last week showed that the Consumer Price Index (CPI) measure of inflation rose sharply to 2.1% in the 12 months ending in May, from 1.5% in April. . The Bank of England and most City economists have forecast inflation to hit around 3% for the rest of the year before falling back to the central bank’s target of 2% next year.

In the last budget in March, the independent Treasury forecaster, the Office for Budget Responsibility (OBR), predicted that inflation would stay at around 2% over the next year.

However, breaking away from consensus, the Resolution Foundation says prices could rise at a faster rate as consumers spend more of their savings accumulated during the lockdown than expected, which would lead to increased demand for goods and services.

The situation could worsen as high levels of vacancies and a shortage of raw materials and essential components such as computer chips, add to the pressure on prices.

Bank of England outgoing chief economist Andy Haldane – one of nine members of the Bank’s Monetary Policy Committee (MPC), which sets interest rates – said earlier this month that “the beast of inflation is once again lurking in the country” and that Britain has faced a “dangerous time”.

Andrew Haldane of the Bank of England said “the beast of inflation is stalking the country again”. Photographie : REX/Shutterstock/Rex/Shutterstock

James Smith, research director at the Resolution Foundation, said the recent surge in prices in the United States had been a foretaste of rising inflation in the United Kingdom. “With the United States experiencing the fastest rise in inflation in almost half a century and the United Kingdom also experiencing large increases, many people are increasingly worried about a possible spiral. prices.

“Although inflationary pressures in the UK are not as strong as in the US, we could still see inflation exceed 4% this summer – a figure well above the expectations of the OBR and the Bank. .

“The temporary nature of this surge in inflation means the bank can look at it and avoid premature rate hikes. But the £ 700 blow to living standards it will bring means households and the government cannot afford to ignore it, ”he said.

Inflation reached 5% in 2011 before falling back to zero in 2012. At its last meeting in May, the MPC signaled that interest rates would stay at their historic lows again as the rise in inflation was expected to be temporary.

Smith adds, “The Chancellor may start by reversing the planned universal credit cut this fall, which will only add to the financial pressures on families. A squeeze in household income later this year, however temporary, is a significant threat to the strength of our current recovery. “

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