E&Y: Inflation has stifled growth

X The Business Desk

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PERSISTENTLY high inflation has knocked almost 3% off UK growth over the last three years and is set to remain above the Chancellor’s target for the foreseeable future, according to the Ernst & Young ITEM Club.
In a special report released today, the Ernst & Young ITEM Club says that had inflation averaged 2% over the last three years – rather than 3.5% – UK GDP would now be more than £10bn higher.
The report suggests that inflationary pressures will peak over the summer, while a strengthening UK and global economy is unlikely to see inflation dip below 2.5% over the next four years.

Carl Astorri, senior economic advisor to the Ernst & Young ITEM Club, said: “High inflation has had a corrosive impact on the UK economy over the last three years, eating into household spending power which has taken its toll on the high street.

“Food prices have soared by nearly 40% 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 and tuition fees.

“But it could have been worse. Our modelling shows the MPC were right to stick to their guns, allowing inflation to overshoot and avoid tightening monetary policy. The alternative scenario would have seen interest rates rise by 3.5% in 2011, choking off the recovery even earlier and adding an additional 625,000 people to UK dole queues.”

The Ernst & Young ITEM Club says CPI inflation will hit 3% over the summer but, with domestic energy bills and food prices set to rise less than last year, will ease back to 2.5% by the autumn. It forecasts inflation of 2.6% in 2014 and 2015.