On Wednesday, the National Institute of Economic and Social Research (NIESR) warned the Bank of England that, as price increases continue to spread to a wider range of economic sectors, the inflation rate in the coming years might exceed the Bank's medium-term target of 2%.
NIESR expects inflation to drop to 5.2% by the end of this year and to 3.9% by the end of 2024. The average inflation rate for 2025, 2026, and 2027 is projected to be slightly above the Bank of England's 2% target.
Since April last year, the UK's inflation situation has continuously deteriorated. Despite the Bank of England hiking interest rates more than ten times since 2022, leading to a reduction in the CPI annual growth rate to 7.9% in July, a significant drop from the 40-year high of 11.1% in October last year. However, the 7.9% annual increase in July is still far from the Bank of England's 2% inflation target.
NIESR pointed out that due to the initial inflation shock, inflationary pressures have indirectly permeated other sectors of the economy, which could force the Bank of England to further tighten monetary policy. Additionally, although high energy costs have been "removed" from the CPI index, other components such as food, services, and real estate are driving price increases.
Prolonged high inflation could pose a significant obstacle to economic growth, as it will lead to a tighter credit environment, placing greater pressure on businesses and households. In the context of persistently high inflation, NIESR forecasts that the UK's GDP will not exceed pre-pandemic levels until the end of 2024.
Although most institutions expect the UK to avoid a recession, NIESR predicts that the UK's Gross Domestic Product (GDP) will only grow by 0.4% and 0.3% this year and next.
For the UK economy, political factors could be one of the optimistic elements that the Bank of England and financial markets may look forward to. As the general election approaches, UK politicians might introduce respective stimulus plans to boost sluggish economic growth rates over the next few months in a bid to win votes.
Stephen Milliard, Deputy Director in charge of macroeconomic modeling and forecasting at NIESR, stated that addressing the UK's poor growth performance remains a primary challenge for policymakers as the next general election draws near. Both Labour and Conservative parties might explore ways to stimulate the economy to gain voter support and secure leadership in the next government.
Previously, the UK Chancellor Jeremy Hunt announced plans to get the UK economy back on track. Hunt said that the autumn statement would show how to break the low growth trap and make the UK one of the most entrepreneurial economies in the world.
