UK: Income squeeze in 2017 – BNPP

Research Team at BNP Paribas expects UK CPI inflation is set to rise to almost 3% by end-2017, and while it should ease somewhat over 2018, they still expect it to end that year above the 2% target.

Key Quotes

“The currency is the key factor here, of course, but energy prices are also part of the story.”

“The rise in inflation will squeeze real incomes, weighing on consumption in 2017. Business uncertainty is likely to increase once Brexit negotiations begin, meaning the economy could stall in mid-2017.”

“Even allowing for weaker growth, the Bank of England expects inflation to rise above target in 2017 and remain there until at least 2020. Further policy easing is, therefore, only likely in the event of a sharper slowdown in growth than we currently envisage.”

“The consensus expectation is for inflation to average 2.4% in both 2017 and 2018. We think inflation is likely to average 2.4% in 2017 and 2.6% in 2018, with exchange-rate pass-through likely to be greater than the market expects.”

“An upside risk is that the service sector, which accounts for more than 45% of total UK exports, will benefit more than assumed from the weak GBP. However, if the government pushes ahead with its planned fiscal tightening, growth could be weaker.”