Tuesday, August 3

UK inflation could rise above 4% this year, warns thinktank | Inflation

The government should prepare for a jump in inflation this year that will affect household living standards and force more low-income families into poverty, according to the Resolution Foundation.

Inflation is on track to rise above 4% in the coming months as the economy opens up and consumers begin to spend some of the savings they have accumulated over the past 16 months, the think tank says. Rising prices will cut average household income by £ 700 early next year and low-income families will be hit the hardest, he predicts.

Given that ministers also plan to reverse a £ 20-a-week increase in universal credit, which was introduced last April, the foundation says there is the possibility of an even greater rise in poverty without government action.

About 6 million people claimed universal credit last month, nearly 100% more than the pre-pandemic total and before the first lockdown triggered a wave of layoffs and short-term work. The 20-pound-a-week cut will 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 through May, up from 1.5% in April. The Bank of England and most city economists have forecast inflation to rise to around 3% for the rest of the year before falling back to the central bank’s target of 2% next year.

At the time of the last budget, in March, the Treasury’s independent forecaster, the Office of Budget Responsibility (OBR), predicted that inflation would remain at around 2% over the next year.

However, in a break from consensus opinion, the Resolution Foundation says prices could rise at a faster rate as consumers spend more of their accumulated savings during the lockdown than previously expected, leading to a increased demand for goods and services.

The situation could get worse as high levels of job vacancies and shortages of raw materials, and crucial components like computer chips, add to price pressure.

Outgoing Bank of England 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 stalking earth again “and that Britain was facing a” perilous time. “

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

James Smith, director of research at the Resolution Foundation, said the recent rise in prices in the United States had been a foretaste of higher 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 sharp increases, many people are increasingly concerned about a possible price spiral.

“While inflationary pressures in the UK are not as tough as those in the US, we could still see inflation surpass 4% this summer, well above Bank and OBR expectations.

“The temporary nature of this inflation spike means that the Bank can analyze it and avoid premature rate hikes. But the impact of £ 700 on living standards that it will bring means that households and the government cannot afford to ignore it, ”he said.

Inflation reached 5% in 2011 before falling back towards zero in 2012. At its last meeting in May, the MPC noted that interest rates would once again remain at their all-time lows, while the rise in inflation was expected to be temporary.

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


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