Inflation to hit four per cent by end of 2017

 
Rebecca Smith
Bank of England governor Mark Carney ended speculation over his future earlier this week
Bank of England governor Mark Carney ended speculation over his future earlier this week (Source: Getty)

UK inflation is set to rise from 0.7 per cent to four per cent by the end of next year, thanks to the falling pound.

That's what the National Institute for Economic and Social Research (NIESR) is forecasting anyway; the think tank says inflation will peak in the latter half of 2017 with a weak sterling making imports more expensive and reducing consumer spending power.

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The rise in prices is likely to "accelerate rapidly" during 2017, and the four per cent figure is a steep jump from the three per cent NIESR had predicted in August. NIESR predicts a 0.5 per cent fall in real per capita income next year, predominantly as inflation will take its toll on wages.

The think tank says it expected sterling to remain at around $1.22 and €1.11 both this year and next.

Simon Kirby, head of macroeconomic modelling and forecasting at NIESR said sterling's depreciation was the "most striking feature of the post-referendum economic landscape" and it would "pass through into consumer prices over the coming months".

"While we expect this to be only a temporary phenomenon, it will nonetheless weigh on the purchasing power of consumers over the next couple of years," Kirby said.

The economy also faces "significant risks" that could restrict growth.

Consumer price index (CPI) inflation was up to one per cent in September, rising from 0.6 per cent the month before, according to the Office of National Statistics (ONS).

The think tank's model, used by policymakers, says consumer prices will rise by 0.7 per cent in 2016, 3.5 per cent in 2017 and 2018, before starting to fall to the Bank of England's (BoeE) target of two per cent by 2021.

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The BoE unveils its inflation report on Thursday, with expectations that it'll raise forecasts for inflation in the quarterly review.

Earlier this week, Governor Mark Carney announced his plans to stay in his position until 2019, after a weekend filled with speculation.

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