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Inflation to hit 3.4% this year, think tank warns

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Inflation will peak at 3.4% this year, according to a leading economic think tank, way above the Bank of England’s (BoE) forecast of 2.7%.

The National Institute of Economic and Social Research (NIESR) said consumer price inflation (CPI) will peak in the final quarter of the year, before falling back to 2.4% in 2018.

Despite the temporary spike in inflation, NIESR expects the base rate to remain at 0.25% until mid-2019.

The think tank expects consumer spending to remain weak throughout this year and next as rising inflation erodes the purchasing power of households.

Inflation has been rising steadily, hitting 2.3% in February – the highest level in three-and-a-half years – and remaining static in March.

Retail sales figures from the British Retail Consortium, released in April, showed that the rise in inflation was starting to bite, with non-food high street sales suffering the worst fall in nearly six years.

NIESR said the UK economy grew by 0.3% in the first three months of 2017, a marked slowdown from the 0.6% seen in the previous quarter.

It attributed the slowdown to “a softening in service output, consistent with a moderation in consumer spending”.

It forecasts GDP growth of 1.7% this year and 1.9% in 2018.

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