The cost of living is forecast to rise to between 2.8% and 2.9% when official data is released next week, driven by higher energy costs and tariff threats from US President Donald Trump.
Inflation is set to lift from 2.5% when the Office for National Statistics publishes its January reading on Wednesday, as the UK economy reacts to domestic price and wage pressures as well as a more uncertain international trading environment.
The Bank of England predicts inflation will hit 2.8%, Goldman Sachs agrees, while Deutsche Bank opts for a slightly higher 2.9% forecast. The central bank’s target is 2%.
Goldman expects energy prices to lift by 1.05% month-on-month, spurred by higher petrol costs and an increase in the Ofgem price cap.
It also predicts food, alcohol, and tobacco to rise by 0.47% and regular pay growth will rise to 5.9%, from 5.6% in November.
The central bank’s rate-setting Monetary Policy Committee has long said it wants to see wage rises under 5% before it can consistently lower the base rate, which was nevertheless cut by 0.25% to 4.5% last week.
Deutsche Bank adds that it expects mortgage interest payments to rise by 0.5% and private rents to lift by 0.45% month-on-month.
Yesterday, President Trump vowed to impose tariffs on countries that charge VAT, leaving Britain at risk of a £24bn blow to its economy.
The UK has a relatively high VAT rate of 20%, while US sales taxes are relatively low.
Capital Economics chief North America economist Paul Ashworth says: “Most people would consider VAT to be a non-discriminatory tax, since it is also applied to domestically-produced goods making a level playing field.
“But [the President’s] adviser Peter Navarro has been pushing the line since Trump’s first term that, since the US only applies a much lower average sales tax at the state level, this is a form of discriminatory tariff.”
The Bank of England expects inflation to hit 3.7% in the third quarter of this year, before falling back.
The UK received some good news yesterday, when official data showed the economy grew by 0.1% in the final three months of last year, driven by rises in the services and construction sectors. This followed no growth in the previous quarter.
However, this still puts pressure on the Bank on whether to continue to ease the base rate at its next 20 March meeting to help a fragile UK economy, risking that loosening the cost of money may push prices up further.
Last week, Bank of England governor Andrew Bailey reiterated his stance that further rate cuts would be “gradual and careful” due to a more uncertain global trading environment.
