UK consumers are set for a big hit as inflation spikes this year

Jasper Jolly
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Low prices could be a thing of the past as inflation hits (Source: Getty)

Inflation is set to spike this year with the hit to consumer spending denting UK growth, according to an influential group of economists.

Annual growth in the consumer price index will average 3.3 per cent in 2017, according to the National Institute of Economic and Social Research (Niesr), before slowing to 2.9 per cent next year.

The Bank of England is mandated to keep inflation below a two per cent target, but it is expected to leave interest rates untouched as the UK enters a period of trade uncertainty on leaving the EU.

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The UK’s GDP growth will slow from two per cent last year to 1.7 per cent in 2017, underperforming world GDP growth of 3.1 per cent, according to the Niesr forecasts. UK growth is then expected to rise to 1.9 per cent in 2018.

Simon Kirby, head of macroeconomic modelling and forecasting at Niesr, said: “Robust consumer spending growth was behind the economic momentum of 2016. Consumers face significant headwinds this year and next.

“Most notably, the pass through from the recent depreciation of sterling to consumer prices is expected to erode the purchasing power of households this year and next,” he added.

The forecasts suggest the government will be able to hit its target for reducing the deficit. Chancellor Philip Hammond changed the fiscal rules of his predecessor George Osborne to aim for public sector net borrowing below two per cent of GDP.