UK’s Sunak may fall short on 2023 inflation goal, NIESR forecasts

By David Milliken

LONDON (Reuters) – British Prime Minister Rishi Sunak risks missing his goal of halving inflation this year as underlying inflation shows little sign of having peaked in Britain or abroad, according to new economic forecasts published by a think-tank on Thursday.

The National Institute of Economic and Social Research (NIESR) estimated annual consumer price inflation will be 5.4% in the final quarter of 2023 – well above forecasts from the Bank of England and the government’s budget watchdog.

Sunak said in January one of his 2023 goals would be to halve inflation, which in December was 10.5% and averaged 10.7% across the final quarter of 2022. The government has not said exactly how the prime minister’s pledge will be measured.

Either way, NIESR’s forecast for inflation at the end of this year is well above the 2.9% pencilled in by the Office for Budget Responsibility in March or the BoE’s 3.9% projection from February, which is due for a quarterly update later on Thursday.

NIESR projected full-year consumer price inflation would be 7.4% in 2023 and 3.9% in 2024.

In common with other forecasters, NIESR expects the BoE to raise its key interest rate later on Thursday to 4.5% from 4.25%, in what would be its 12th consecutive rate increase.

While energy and commodity prices have fallen since they surged last year due to Russia’s invasion of Ukraine, ‘core’ measures of inflation have not dropped as businesses seek to preserve profit margins and raise pay in a tight labour market.

In addition, Britain’s productive capacity had been damaged by the global financial crisis, a “botched Brexit” and the COVID-19 pandemic, NIESR Director Jagjit Chadha said.

“That means there’s more incipient inflationary pressure in the economy than would otherwise be the case,” he said.

The BoE is unlikely to bring inflation back to its 2% target until late 2025, NIESR predicts.

The central bank has said it expects to bring inflation below its target in 2024.

Overall, NIESR expects high inflation since the start of the pandemic to leave Britain’s poorest fifth of households an average of 4,000 pounds ($5,000) a year worse off.

Chadha said Sunak’s pledge to halve inflation blurred the line between the government and the operationally independent BoE and might even have made people think inflation would be higher than they previously expected.

“The government, by stating a target for halving inflation this year, has inadvertently provided an unhelpful focal point for inflation at some 5% by the year-end. The previous central case was for something well below that,” Chadha said.

NIESR is more optimistic about the outlook for economic growth than many forecasters, predicting gross domestic product will rise 0.3% this year and 0.6% in 2024.

Last month, the International Monetary Fund predicted Britain’s economy would shrink by 0.3% in 2023, the biggest decline of any major advanced economy.

($1 = 0.7923 pounds)

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