UK consumer price inflation has been forecast to hit 3.9% next year, a think tank said on Monday.
The National Institute of Economic and Social Research (NIESR) said that inflation would soar to almost double the Bank of England’s (BoE) target rate in early 2022, before falling back to 2% in 2023 following a bank interest rate hike. This would be the highest rate of inflation since late-2011.
The growth forecast for the UK was also revised up for the year by 1.1 percentage points to 6.8%.
NIESR added that only the West Midlands and Londons are expected to have gross value added (regional GDP) of more than 4% higher than the pre-COVID peak.
That is only half the growth that was expected without the pandemic.
“Supply-side factors and effects of reopening amid the recovery in consumption are likely to keep inflation well-above the Bank of England’s 2% target for the most part of next year,” said Hande Kucuk, NIESR’s deputy director.
“Now is the time for the monetary policy committee to prepare the ground for normalising its monetary policy stance by clearly communicating how asset purchases and the Bank rate will be adjusted in response to a changing inflation outlook.”
Kucuk said that the BoE should follow a carefully communicated and gradual approach to avoid tightening financial conditions that might prevent recovery.
This was the second inflationary alarm bell sounded in the UK on Monday, after IHS Markit’s monthly manufacturing index warned that stretched supply chains— hit by complications from both COVID-19 and Brexit — led to a sharp rise in costs.
According to IHS Markit‘s monthly purchasing managers’ index (PMI), raw material, staff and skill shortages were all major factors stymieing output growth and contributing to a further marked increase in input purchasing.
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