INFLATION will drop from a record high of 5.2% to less than 2% over the next 12 months but any respite for hard-pressed consumers will prove to be short-lived, economists predict.
The Ernst & Young ITEM Club said inflationary pressures will ease from next year as the increase in the standard rate of VAT rate in January ceases to affect annual comparisons and oil and gas supplies recover from the conflict in Libya.
However, the ITEM club said economic growth in countries such as China and population increases will put renewed pressure on prices further out. The resulting price rises could pose challenges for consumers and the Bank of England alike.
Neil Blake, senior economic adviser to the ITEM Club, advised consumers to enjoy next year’s respite as much as they can.
He said: “The five-year outlook is far less rosy as inflationary pressures begin to bite once again. This will be compounded by weak wage growth. While there is so much spare capacity in the labour market, from rising unemployment and a large number of temporary workers, employees will have limited bargaining power to demand higher wages.”
Mr Blake added that the expected increases in prices may force the Bank of England to reconsider its approach to tackling inflation during a period when the UK economy is likely to remain fragile.
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