UK Prime Minister Rishi Sunak will struggle to meet his target of halving inflation this year and has complicated the Bank of England’s job by making the pledge, the National Institute of Economic and Social Research said.
Inflation will be 5.4% in the final quarter of the year as wages and prices remain elevated, the research group said in its Spring forecast released Thursday. In the final three months of 2022, inflation was 10.7%.
Sunak put the pledge at the heart of his economic plans in January, aiming to help households with the toughest squeeze on living standards in generations. He also wants to expand the economy this year and put the national debt on course to fall as a share of gross domestic product.
NIESR’s forecasts suggest he will have little to celebrate. High inflation will condemn households to two more years of falling real disposable incomes, down 0.7% in 2023 and 1.1% in 2024. The poorest fifth of the population is on track to be £4,000 ($5,044.2) a year worse off than before the pandemic as the cost-of-living crisis hits them hardest.
The economy will grow just 0.3% this year and, while Niesr expects the national debt to fall rapidly. That’s largely because high inflation boosts VAT receipts and will drag more workers into paying higher rates of income tax.
Sunak would meet his inflation pledge if inflation drops to 5.2% in the month of December. The Treasury declined to comment.
Jagjit Chadha, Niesr’s director, also launched a fierce attack against Sunak’s inflation pledge. Setting the target when inflation was over 10% was a “misstep” and “created a focal point of 5%” for price and wage expectations that interfered with the BOE, he said.
“People are now planning at 5%, rather than 4% or less, and this is making inflation more persistent,” Chadha said. “The government should not involve itself in forecasting inflation or attempt to take credit. This year, the government has made the BOE’s job harder.”
The BOE later Thursday is expected to raise rates by a quarter point to 4.5%. That would mark the highest level since 2008 and the 12th consecutive increase as it tries to cool inflation, which remains in double digits.
Niesr expects one more quarter point increase this year but for rates to remain above 4% until 2025 — far longer than markets are expecting.
The research group was the first forecaster to anticipate the UK will avoid a long recession this year as the BOE expected. The central bank will update its forecasts Thursday, likely bringing them closer to those drawn up by Niesr.
The institute also warned that the global economy would grow more slowly this year than any year since 2009, excluding the 2020 crash in the pandemic. Global GDP will expand 2.8% in 2023, it said.
