By David Milliken
LONDON, May 11 (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)
(Reporting by David Milliken; Editing by Paul Simao)
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