Chances of inflation hitting three per cent on the rise

26 May 2017

  • Economists see an increasing chance of inflation reaching three per cent
  • There is now a 68 per cent chance of low growth in 2017
  • Brexit has yet to seriously disrupt the UK economy
  • WBSFS more optimistic about growth in 2018 than the Bank of England

There is a 25 per cent chance that inflation will hit three per cent this year according to the Warwick Business School Forecasting System (WBSFS).

Using the revised GDP figure, which saw growth in the first quarter of 2017 trimmed to 0.2 per cent, the WBSFS combines five state-of-the-art econometric models to produce judgement-free macroeconomic forecasts for UK GDP growth and CPI inflation.

Consistent with the depreciation of the pound since the EU referendum last June, inflation is predicted by the WBSFS to pick up further in 2017 and 2018; relative to one quarter ago, the probability of inflation exceeding three per cent in 2017 has increased from nine per cent to 25 per cent. It also forecasts a 33 per cent chance that this high level of inflation will persist through 2018.

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The WBSFS also finds that the probability of disappointing 'low growth' of less than two per cent in 2017 has increased from 38 per cent, one quarter ago, to 68 per cent. This implies that there is only a 32 per cent chance of 'strong growth' in 2017.

The prospects for growth in 2018 are considerably more uncertain, both on the upside and downside. Growth below one per cent and above three per cent are predicted to be equally likely with a probability of around 20 per cent.

Growing problem: The forecasts from WBSFS

Ana Galvao, Associate Professor of Economic Modelling and Forecasting in WBSFS, said: “Due to the recent downward revision to GDP growth for 2017 Q1 by the ONS, the WBSFS reveals that relative to one quarter ago, the probability of growth of less than two per cent is now 68 per cent, almost twice the value estimated last quarter.”

James Mitchell, Professor of Economic Modelling and Forecasting, added: “The latest forecasts from the Bank of England and IMF increasingly agree with the WBSFS that growth in 2017 will not seriously disappoint, even if there remain elevated downside risks of 'low growth'.

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"This is consistent with the view that Brexit has yet to disrupt historical relationships between macroeconomic variables.

"But while the gap between the judgement-free forecasts produced by the WBSFS and professional forecasters’ predictions has narrowed in the last couple of quarters, the Bank of England and IMF remain slightly more pessimistic about GDP growth in 2018 than the WBSFS.”

Anthony Garratt, Professor of Economic Modelling and Forecasting, said “The WBSFS now predicts a one in three chance that inflation will above two per cent in 2017 instead of the smaller one in five chance one quarter ago. And the system forecasts a one in three chance that inflation above three per cent will persist through 2018.” 

For more on the WBSFS visit its website.

James Mitchell teaches Managing in a New World on the Full-time MBA and Economics of the Business Environment? on the Executive MBA and Executive MBA (London)

Anthony Garratt teaches Economics in the Global Environment on the MSc Management course and on the Executive MBA and Empirical Applications in Macro, Financial and Energy Economics? on the MSc Finance.

Ana Galvao teaches Economics for Management and Business and Forecasting for Decision Makers on the MSc Management course.

 

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