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Inflation to hit 4% next year, says think tank

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Inflation will peak at 4% in the second half of 2017, hurting real disposable incomes, a leading think tank forecasts.

The National Institute of Economic and Social Research (NIESR) said inflation will “accelerate rapidly” from September’s rate of 1% next year as sterling depreciation is passed through to consumer prices, before returning to the Bank of England’s 2% target in 2020.

Simon Kirby, head of macroeconomic modelling and forecasting at NIESR, said: “The depreciation of sterling has been the most striking feature of the post-referendum economic landscape. This will pass through into consumer prices over the coming months and quarters.

“By the end of 2017 we expect consumer price inflation to have reached almost 4 per cent. While we expect this to be only a temporary phenomenon, it will nonetheless weigh on the purchasing power of consumers over the next couple of years.”

In the past three months since the Brexit vote, sterling has hit a 31-year low against the dollar and a 5-year low against the euro.

Danny Cox, chartered financial planner at Hargreaves Lansdown, said: “The bad news for savers just gets worse, as declining interest returns cannot match the rate at which prices are set to rise. Savers face the continuing vicious circle of eating into their capital or taking a leap up the rungs of the risk ladder in search for inflation beating returns.

“The only cash product guaranteed to beat the rate of rising prices are NS&I Index-linked Savings Certificates. New issues are as rare as hen’s teeth, but if you already hold them you can roll them over at maturity for another term.”

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