NIESR says inflation will rise to 3.4%, well above OBR forecast, prompting real-terms cut in takehome pay

This article is more than 3 years old

This article is more than 3 years old

British workers will see their disposable incomes shrinking this year as a result of rising inflation that will peak at 3.4%, a leading economic thinktank has warned.

The National Institute of Economic & Social Research said that wage rises would be capped at only 2.7% on average, leaving workers to face the largest real-terms cut in their takehome pay since early 2014.

The warning follows the controversy over rising energy bills and inflation-busting increases in council tax that have already hit household budgets ahead of the general election.

UK pay growth outlook is among gloomiest in OECD, says TUC Read more

Recent surveys have shown consumers devoting a bigger slice of their weekly shopping budget to essential items in response to increasing prices by a wide range of retailers.

Theresa May has pledged to cap energy costs to boost disposable incomes, while Jeremy Corbyn wants to intervene in the housing market to reduce the escalating cost of buying a home and monthly rental costs.

The prediction for a spike in inflation of 3.4% is well above the level forecast by the Office for Budget Responsibility, the Treasury’s independent forecaster, which said earlier this year inflation would reach 2.4% by the end of 2017.

Inflation has already begun to rise steeply. It jumped markedly in February to 2.3% to overtake regular wage rises, which only inched ahead by 1.9% month on month.

NIESR said wage growth was likely to pick up over the rest of the year, but remain well below inflation, denying the average worker a real terms rise.

Simon Kirby, NIESR’s UK economic forecaster, said that with inflation already hitting 2.3%, the OBR would be forced to revise its forecast upwards.

He said: “GDP growth over the next couple of years will be subdued, growing at less than the economy’s long-run potential rate of 2% per annum, but households will feel the pinch from rising consumer price inflation.”

He added: “The rate of inflation is expected to rise from 2.3% per annum in March to almost 3.5% by the end of 2017. By 2018 we expect consumer spending growth to have effectively stalled.”

Kirby said a previous forecast that predicted inflation would hit 3.7% had been revised lower in response to reports showing that the impact of the falling pound would be spread over a longer period.

NIESR said that despite the squeeze on disposable incomes the GDP growth rate would pick up from 1.7% this year to 1.9% in 2018.

It said moves towards Brexit since the vote to quit the EU last June had made little impact on its forecasts. It said the triggering of article 50 had only a short term impact on financial markets, leaving the economy to move ahead, albeit at a slower pace than before the vote.

Kirby said the labour market remained “robust” with an unemployment rate of 4.7% and an employment rate hitting a record high in the three months to February of 74.6%.



But he said surveys continued to show that millions of workers want an increase in the number of hours they work, showing that firms could increase output without taking on new staff or increasing hourly rates.

“Despite the strong performance of the labour market, real wages growth remains subdued, perhaps indicating some slack remains,” he said.

Bank of England officials are expected to keep interest rates at their record low of 0.25% when they meet on Thursday to offer continued support to the economy and the jobs market.

Economists forecast that just one policymaker, Kristin Forbes, will vote for a rate rise to quell inflation, while the other seven members will consider the increase in prices to be temporary.

Kirby said he expected the BoE’s monetary policy committee to keep rates on hold until after the UK has quit the EU in 2019 when it will start to rise towards 2% in the latter half of 2022.

A report by NIESR on the global economy said increasing activity in the developing countries would push GDP growth higher following a four year low point in 2016.

Risks to the forecast came from the UK leaving the EU without a trade deal and US president Donald Trump introducing protectionist policies, but without these threats, the outlook was for an improving global growth rate.