What is next for UK Inflation?

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UK inflation reached its highest rate for the first time in two and a half years recently, but with the uncertainty following the Brexit vote and the recent rise in fuel and food prices, what does this mean for the UK economy in 2017? Martin Walker, Professor of Finance and Accounting at Alliance Manchester Business School, casts an expert eye on the topic.

There are many factors contributing to the recent rise in inflation, however it is difficult to predict just how high inflation will rise because of ongoing negotiations on Brexit and new trade deals.

According to the Office for National Statistics (ONS), annual inflation as measured by the Consumer Prices Index (CPI) reached 1.8% last month, up from a rate of 1.6% in December. The ONS also reported an unexpected dip in wage growth to 2.6 per cent a year.

Following the Brexit vote and due to a very significant fall in the pound, the costs of imported materials, in particular fuel, were bound to rise. It is highly likely that inflation will continue to rise as increased costs continue to feed through to retail prices. Food prices also contributed to the rise in inflation, as they remained unchanged between December and January, having fallen a year ago.

It is difficult to predict just how high inflation will go but we are potentially looking at a peak value between 3.1 and 3.8 percent around the end of 2017. The peak inflation rate will also likely be substantially greater than pay rises.

Therefore, real wages will fall on average, which could reduce consumer demand and the growth rate in the last half of 2017 – and the first half of 2018 – more than it would have been in the absence of Brexit. Inflation will most likely start to fall.

The uncertainty following the Brexit vote is reflective of the volatility of the UK economy after 2017. Presumably, success will depend on how well the negotiations on Brexit proceed and the impact of political decisions regarding new trade deals after Brexit in 2019.

One particular issue, that we all need to keep a close eye on, is the potential impact of Brexit on investment by overseas companies in the UK. If this does not decline, then it will bode well for the long term. If it goes into a sharp decline then Brexit will start to look like a failure.

The only thing we know for certain, in all of this uncertainty, is that Brexit has increased economic and political uncertainty both for the UK and for Europe as a whole.

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Alliance Manchester Business School

Alliance Manchester Business School has a global reputation for innovative and influential teaching and research, which impacts business on a local, national and international level. We call this Original Thinking Applied.

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