Inflation could hit 4% in the second half of 2017 – with price increases set to damage the economy through weakened consumer spending power.
The prediction was made by the National Institute of Economic and Social Research (NIESR) in an update of its economic predictions for this year and next.
It said that while the effects of the collapse in the value of the pound would push up inflation by making imported goods more expensive, the economy could also be hurt by the simple action of triggering Article 50 to leave the EU next Spring.
The body did however upgrade its growth predictions to 2% for 2016 followed by 1.4% in 2017.
It was joined in issuing fresh forecasts on Wednesday by the CBI.
The business group slashed its expectations for economic growth in 2017 from 2% to 1.3% – warning that Brexit uncertainty would hit business investment.
It also predicted that household spending would be squeezed by rising inflation – currently standing at 1%.
The CBI said the Chancellor’s Autumn Statement later this month would be a “golden opportunity” to help the economy by stimulating investment – building on the recent Heathrow runway announcement – and reducing uncertainty.
CBI chief economist Rain Newton-Smith said: “Certainty and stability, vital ingredients that allow businesses to invest and create jobs across the UK, have been absent since the vote to leave the EU.”
She said that business leaders would look to the Chancellor to incentivise investment with the Autumn Statement.
The new forecasts were released a day before the Bank of England publishes its quarterly inflation report, giving its current outlook for the UK economy as well as announcing its latest interest rate decision.
Official figures last week showed GDP increased by 0.5% in the third quarter – defying expectations for growth to grind to a halt after the Brexit vote.
But the CBI predicts that the fallout will start to take full effect next year.
It sees the weak pound – which makes imported goods more expensive – sending inflation above the Bank of England’s 2% target in the second quarter of 2017, holding back consumer spending growth.
The outlook chimes with a warning from the British Retail Consortium (BRC) that the fall in sterling since the referendum will stoke inflation.
Its latest shop price index showed prices continuing to turn lower, falling 1.7% in October compared to a year ago.
But it said a return to inflation was inevitable with prices expected to turn higher in the first quarter of 2017.
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