Inflation fall may not rescue Osborne

A boost to consumer wallets from easing inflation may not be enough to save the Chancellor from busting his deficit-cutting targets, a leading economic forecaster has warned.

The UK will pull out of its double-dip recession in the second half of the year, helping the high street as shoppers prop up an anaemic recovery, according to the Ernst & Young ITEM Club.

The Consumer Prices Index — the Bank of England's benchmark inflation figure — is set to fall to a near three-year low of 2.2 per cent in figures published today.

But the forecaster, whose predictions are based on the Treasury's model, is still inking in a 0.2 per cent slide for the overall economy this year, gradually rising to 1.2 per cent in 2013.

The disappointment on growth puts Chancellor George Osborne in danger of missing his target on erasing the current deficit, it warns. This would add to the Chancellor's embarrassment as he is also due to miss his goal of putting the UK's debt as a share of overall GDP on a downward path by 2015/16.

Chief economic advisor Peter Spencer said the late growth spurt would not be enough to prevent an £8bn overshoot of the Office for Budget Responsibility's (OBR) £95bn deficit forecast for the 2012-13 year.

He said: "Public finances have been hit with a pincer movement of higher spending and lower tax receipts, which is causing the UK to slip against the OBR's deficit forecast. We think this is largely cyclical but the OBR may view this deterioration as structural and suggest that further policy tightening is necessary after the election if the Chancellor is to meet his fiscal targets."

Bank of England interest-rate setters will give a further clue about the economy in their monthly minutes this week.