World Economy

UK Inflation May Surpass 3%

Consumer spending will slow as inflation starts to erode disposable incomes.Consumer spending will slow as inflation starts to erode disposable incomes.

Inflation will smash past the British government’s limit and hit 3.1% by the end of March, according to EY ITEM Club think tank.

It will say the collapse of the pound, which is trading at 30-year lows against the US dollar, will drive import costs higher and send inflation bursting through the Bank of England’s official 2% target, when it publishes its latest forecasts Tuesday, news outlets reported.

If inflation goes past 3%, the central bank’s Governor Mark Carney will be forced to write an open letter to Chancellor Philip Hammond explaining why it happened and how he plans to get it back under control. 

The think tank believes that consumer spending, which has been the principal driver of economic growth, will slow as inflation starts to erode disposable incomes.

However, it adds that the hit will be softened by higher levels of exports, which have benefited from the devaluation of sterling. 

Due to Britain’s so-far robust economic performance, the ITEM Club, which uses the treasury’s models, has raised its 2017 forecast from 0.8% gross domestic product growth to 1.3%.

However, it warns that growth will fall to 1% in 2018 as Britain’s economy undergoes a “hard rebalancing”.

On Thursday, preliminary figures from the Office for National Statistics are expected to show that the economy grew by 0.5% during the fourth quarter of 2016 because of the strength of the services sector, giving an overall figure for the year of 2.1%. said.

Investec economist Victoria Clarke said late Saturday: “As services are four-fifths of the economy and they have stayed strong enough, we should see decent growth in the fourth quarter. It was about the weak pound boosting exports and consumers spending while wages went up. However, there’s going to be a slowdown in 2017 as household finances are going to get squeezed.” 

However, Henderson Global Investors chief economist Simon Ward said: “We’re looking for GDP to come in at up to 0.6%, which is above consensus. It looks as if the services sector was driving growth during the fourth quarter, while industry was flat and construction was a drag. If we get 0.6%, it will add to the feeling that Project Fear got it wrong.”

This week, the ONS will also publish the latest public sector finance figures, which are expected to show that the national debt has climbed to more than £1.7 trillion ($2.1 trillion). 

Economists also believe that the ONS will say that the government borrowed £6.7 billion in December, compared with £7.2 billion for the same month in 2015. 

IHS Markit chief European and UK economist Howard Archer said: “The data out on Tuesday is expected to indicate that the public finances improved modestly in December compared with a year earlier, thereby keeping the government on track to at least meet its revised target for 2016-17.”

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