Inflation in the UK economy could accelerate to 3 per cent this year, above the Bank of England’s current forecasts, according to one of its policymakers who thinks GDP growth will still prove to be robust this year.
Michael Saunders, the newest member of the nine-member monetary policy committee, said recent data suggests the falls in the pound following the Brexit vote were still passing through to inflation which hit 2.3 per cent in March – a more than three-year high.
“I would not be surprised if CPI inflation reaches 3 per cent later this year or early next”, Mr Saunders said in a speech to the Federation of Small Businesses on Friday.
However, Mr Saunders said the surge in consumer price growth did not mean post-Brexit Britain “will face persistently high inflation” or that the BoE had “gone soft on our low inflation remit”.
“Over time, the appropriate monetary policy can and will ensure that inflation returns to the 2 per cent target, consistent with our remit”, said the former Citibank economist.
The BoE has adopted a broadly neutral stance on its next interest rate move as it aims to juggle a moderation in growth with the highest rate of inflation since 2014.
Higher prices are expected to squeeze consumer spending power in the months to come, but Mr Saunders added the outlook for households remained uncertain.
“Consumers might view the real wage squeeze as temporary and, amidst ample credit availability, save less and maintain spending more than expected.”
He added that growth was more likely to exceed a forecast of 1.5 per cent this year to reach around 2 per cent, with the components of UK growth shifting away from households towards investment and exports – helped along by a weak pound.
“I suspect that the next year or two will see steady growth, above-target inflation, stronger exports, and a pickup in business investment. And there are no signs so far that productivity trends are weakening” said Mr Saunders.