Think-Tank Warns Inflation Could Rise Above 4% This Year

The forecast by the Resolution Foundation think-tank raises new concerns about household budgets as the planned cut in universal credit is due to take place later this year.

According to the foundation, the Government should prepare for a rise in inflation this year that will squeeze household living standards and force more low-income families into poverty. As the economy opens up and consumers start to spend some of the savings they have accumulated over the past 16 months, the think-tank says inflation is on course to jump above 4pc in the next few months.

Rising prices will eat into average household incomes to the tune of £700 by the start of next year, with low-income families among the worst hit, it forecasts. As ministers also plan to reverse a £20 per week increase in universal credit (UC), introduced in April of last year, the think-tank believes there is the possibility of an even greater rise in poverty without government action.

Around 6 million people claimed UC last month, an increase of almost 100pc from the pre-pandemic total, before the first lockdown resulted in a wave of redundancies and short-term working. The cut of £20 per week is due to take effect in the autumn.

‘Beast of inflation stalks the land’

Figures published last week revealed the consumer prices index (CPI) measure of inflation rose abruptly to 2.1pc in the 12 months to May, up from 1.5pc in April. The Bank of England (BoE) and many City economists have predicted that inflation will climb to around 3pc over the rest of the year before dropping to the central bank’s target of 2pc next year.

The Office for Budget Responsibility (OBR), the Treasury’s independent forecaster, predicted at the time of the last budget, in March, inflation would remain at around 2pc over the next year. However, at odds with the majority view, the think-tank says that prices could rise faster, as consumers spend more of their savings built up over lockdown than previously expected, leading to a spike in demand for goods and services.

The situation could even deteriorate as high levels of job vacancies and a shortage of raw materials and vital components such as computer chips, pile pressure on prices.

Andy Haldane, the BoE’s soon to depart chief economist, one of nine members of the Bank’s monetary policy committee (MPC), which sets interest rates, said earlier this month that the ‘beast of inflation is stalking the land again’ and that the UK faced a ‘dangerous moment’.

Rise in inflation expected to be temporary

James Smith, Research Director at the think-tank, said the recent leap in prices in the US had been a pointer to higher inflation in the UK. Many people are becoming increasingly concerned about a potential price spiral as the US experiences the fastest rise in inflation in almost fifty years, and the UK also sees sharp increases, he said.

Although Smith thinks UK inflationary pressures are nowhere near those in the US, inflation could still break through 4pc this summer, a figure well in excess of of the OBR and Bank’s expectations.

The temporary nature of this inflation spike means the Bank can look beyond it and avoid premature rate increases. Yet, he said, the £700 hit to living standards it will cause means households and the Government cannot afford to ignore it.

Inflation rose to 5pc in 2011 before dropping towards zero in 2012. The MPC, at its last meeting in May, signalled that interest rates would again stay at their historic lows, while the rise in inflation was expected to be temporary.

Smith adds that the chancellor could start by cancelling the planned cut to UC this autumn, which will only add to families’ financial pressures. But a reduction in household incomes later this year, albeit temporary, would be a significant threat to the strength of our present recovery.

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