Brexit: Inflation set to rise as UK economy faces slowdown

The economy's stability since the EU referendum was “deceptive”, EY said

Sterling's fall means imported goods bought in foreign currencies becoming more expensive. (AFP/Getty)

Britain’s economy faces a prolonged period of weaker growth as the slump in the value of the pound pushes up prices for consumers, with official figures expected to show a sharp rise in inflation on Tuesday.

The EY Item Club has warned that the UK economy has shown greater resilience than many had anticipated since the EU referendum, but that this picture is “deceptive”.

The think tank predicts inflation will climb by 2.6 per cent in 2017, before easing back to 1.8 per cent in 2018.

This will cause growth in consumer spending to slow from an expected 2.5 per cent this year to 0.5 per cent in 2017 and 0.9 per cent the year after, the report said.

At the same time, uncertainty around the UK’s future relationship with the EU is likely to weigh on corporate confidence, knocking business investment back by more than 2 per cent in 2017, after a fall of 1.5 per cent this year.

The UK’s economy is expected to expand by 1.9 per cent this year, slowing to 0.8 per cent in 2017 before recovering slightly to 1.4 per cent in 2018, according to the report.

Peter Spencer, chief economic advisor to the EY Item Club, said: “Sterling’s shaky performance this month provides a timely reminder that challenges lie ahead.”

“As inflation returns over the winter it will squeeze household incomes and spending.”

“The pressure on consumers and the cautious approach to spending by businesses mean that the UK is facing a period of relatively low growth.”

The report came as Nick Clegg, the former Liberal Democrat Leader, warned that only a “soft” Brexit, with some compromises on immigration and EU payments, could avoid tariffs on beef exports of 59 per cent, chocolate at 38 per cent, cheese at 40 per cent and wine at 14 per cent.

On Friday, the Bank of England’s Governor Mark Carney, said life will “get difficult” for the most vulnerable people in Britain as inflation rises in the coming months due to the sharp depreciation of sterling in the wake of the UK’s vote to leave the EU.

Carney said that inflation was likely to overshoot the Bank’s official 2 per cent target over the coming years, but that the Bank would tolerate this in order to protect jobs.

The Bank’s most recent inflation forecasts from August predicted consumer price inflation would hit 2 per cent in the third quarter of 2017.

The pound remains under pressure against the dollar after falling to its lowest level on record against a basket of currencies last week as investors became increasingly worried that Britain will lose its preferential trading terms with the EU – a so-called “hard Brexit”.

The slump in the value of the pound means imported products bought in foreign currencies becoming more expensive.

On Monday, Sterling was back below $1.22 and €1.11 in early trading. This compares with $1.49 and €1.31 on the night of the EU referendum vote in June.