Even if tomorrow’s inflation figures show the first fall in inflation since September, Britons should still expect the annual rise in prices to remain high for the next four years, says the Ernst & Young Item Club.
The Office of National Statistics (ONS) is expected to reveal a small dip in inflation tomorrow, from 2.8% to 2.6%, as lower petrol and beer duties reduce some pressure on the rising cost of living.
But Britons should make no mistake that prices will rise far above wages “for the foreseeable future”, said Ernst & Young, which estimates that high inflation has cost the economy £10 billion since 2010.
Inflation has exerted a “corrosive impact on the UK economy”, said the Item Club's report, which also predicted that it would remain above its 2% target until at least 2017.
This rather sharply contests the latest Bank of England forecast, which predicts a return to target in just two years.
Inbound Bank of England Governor, Mark Carney, who replaces Sir Mervyn King this year, faces the unenviable task of trying to encourage economic growth while keeping a lid on prices.
Martin Weale, an external member of the Bank of England’s Monetary Policy Committee, has said that allowing inflation to rise unchecked would damage the Bank’s credibility to keep inflation under control.
Speaking to the British-American Business Council, Dr Weale said: "we are very conscious that policy affects output as well as inflation and that periods of below-normal output have very substantial costs association with them.
"Failure to damp sufficiently any new shock pushing up on inflation would result in inflation expectations becoming more entrenched.
"That, in my view, limits the scope we have to support demand at the current juncture."
Sustained high inflation spells bad news for savers in a depleted market. A few thought on why it remains important for savers to pursue the best products on the market can be found here.
Keith McDonald
Which4U Editor
If you enjoyed this article:
- Check out the latest articles on our Finance Blog.
- Sign up for our free e-newsletter.
- Follow us on Twitter for regular updates.
{loadmodule php,TwitterButton}