High Inflation a 'Permanent Fixture' in the UK: Economists

Pound coin
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Pound coin

Inflation in Britain will peak over the summer and remain well above 2 percent – the target set by the U.K's Chancellor – for the foreseeable future, Ernst & Young warned on Monday.

A report by the company's economic forecasting group, the ITEM Club, said high inflation will remain a "permanent fixture" of the U.K. economy.

"Base effects are likely to send consumer price inflation above 3 percent in the summer. And though inflation should cool in the autumn, as domestic energy and food prices rise by less than they did last autumn, we think it unlikely that inflation will dip below 2.5 percent," the report said.

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The group estimated that the inflation rate would stand at 2.9 percent in 2013, before falling back to 2.6 percent in 2014 and 2015.

The ITEM Club's forecasts contrast with those from the Bank of England. On Wednesday, the central bank's outgoing Governor, Mervyn King, said inflation would be close to 2 percent in two years' time.

However, U.K. inflation has been above this target since December 2009 and the central bank has cited this as one reason for not restarting its bond repurchase program.

"One of Mervyn King's last acts as Bank of England Governor will almost certainly be a letter of explanation to the Chancellor to explain yet another inflation overshoot. And further out it's unlikely that the U.K. will get back to the Chancellor's 2 percent target," said ITEM Club senior economic advisor Carl Astorri.

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The ITEM Club's report outlined the negative impact of high inflation on Britain's economy, which is struggling to maintain growth. Last month, official figures showed the U.K.'s gross domestic product (GDP) grew by just 0.3 percent in the first quarter of the year.

"High inflation has had a corrosive impact on the U.K. economy over the last three years, eating into household spending power which has taken its toll on the high street," Astorri added. "Food prices have soared by nearly 40 percent since 2007, while businesses and consumers have also had to endure the impact of rising oil and commodity prices, a weakening pound, plus hikes to VAT [sales tax] and tuition fees."

The report authors said that if inflation had been lower over the last three years and averaged2 percent, Britain's GDP would be around 10 billion pounds ($15 billion) higher.

But Astorri said that the situation in the U.K. could have been worse if the central bank had tried to combat inflation by tightening monetary policy.

"The alternative scenario would have seen interest rates rise by 3.5 percent in 2011, choking off the recovery even earlier and adding an additional 625,000 people to U.K. dole queues," he added.

The U.K's Office for National Statistics will release inflation data for April on Tuesday.