Inflation in Britain Could Jump to 4 Percent by the End of 2017

Inflation in Great Britain could reach 4 percent in the second half of 2017, primarily due to the weakening of the pound, significantly higher than the current 1 percent, which would reduce the disposable income of the population, estimates the National Institute of Economic and Social Research (NIESR).

Consumer price growth will “rapidly accelerate” during 2017 as the impact of the pound’s depreciation spills over to consumers, NIESR states in its new estimates, which predicted in August that inflation would reach 3 percent.

The economy, NIESR warns, is also facing “significant risks” that could harm the growth of gross domestic product (GDP).

Inflation, measured by consumer prices, reached 1 percent in Britain in September, up from 0.6 percent in August, marking its highest level in nearly two years. Notably, prices for clothing and footwear, gasoline, and hotel accommodation have significantly increased, according to the latest data from the UK Office for National Statistics (ONS).

The pound has fallen against the US dollar by about 15 percent, to $1.22, since Britons voted to leave the European Union in a referendum, and the pound has also weakened significantly against the euro, to €1.11. NIESR estimates that the pound’s exchange rate will remain at these levels next year.

The pound’s depreciation will “spill over into consumer prices in the coming months and quarters. While we expect this to be a temporary phenomenon, it will nonetheless pressure consumers’ purchasing power in the next few years,” says Simon Kirby, director of macroeconomic forecasts at NIESR.

NIESR estimates that real income per capita in Britain will fall by 0.5 percent in 2017, primarily because inflation will ‘bite’ into wages. It also warns that an increase in oil prices is expected in the near future, which should also drive inflation.

An inflation rate of 4 percent in Britain has not been recorded since 2011, and in recent years, it has been significantly lower, primarily due to falling oil prices.