Inflation set to rise above two per cent in 2017

01 March 2017

  • Forecasters find a 63 per cent probability inflation will rise above two per cent 
  • GDP above two per cent predicted for 2017
  • Still no effect in forecasts from the Brexit vote
  • 2018 could see a dip in GDP to below two per cent

Inflation is set to rise post-Brexit but the UK economy will continue to grow according to the latest calculations from the Warwick Business School Forecasting System (WBSFS).

The WBSFS continues to find little evidence in the latest data, which included an upwards revision to GDP growth during the last two quarters of 2016 by the Office for National Statistics (ONS), to suggest that economic growth will disappoint in 2017 and 2018 despite Brexit.

Having said that, the downside tail risks are higher in 2018 than 2017, with a one-in-five chance that GDP growth dips below one per cent in 2018.

And consistent with the depreciation of the pound since the referendum last June, inflation is now strongly predicted by the WBSFS to pick up through 2017 and 2018.

Related course: Executive MBA (London)

But the risk of inflation breaching its target range of two per cent are forecast to remain moderate, with a 37 per cent probability that the Governor of the Bank of England has to write a letter to the Chancellor in 2018.

No show: Data suggests Brexit will have little impact on GDP growth

The WBSFS' Ana Galvao, Associate Professor of Economic Modelling and Forecasting, said: “The WBSFS continues to predict the UK economy will most likely grow between two and three per cent through 2017 and 2018.

"The recent upward revisions made by the Bank of England and the IMF to their UK growth forecasts mean they are now more in-line with the judgement-free forecasts produced by the WBSFS that suggest Brexit has yet to disrupt historical relationships between macroeconomic variables.”

What will happen to the UK economy in 2017?

James Mitchell, Professor of Economic Modelling and Forecasting, added: “What remains unclear is how the apparent increase in macroeconomic uncertainty, post-referendum, will affect relationships between UK macroeconomic time-series.

"But what the WBS forecasting system does reveal is that recent economic data provide no clear indication that a change for the worse in terms of future economic growth is likely to happen in 2017.

"The most likely outcome for 2018 is also that the UK economy will grow around two per cent, although there is a one-in-five chance that growth disappoints and falls beneath one per cent.”

Anthony Garratt, Professor of Economic Modelling and Forecasting, said “The WBS forecasting system reveals how inflation is expected to pick up in 2017 and 2018.

"Following recent rises in UK inflation and the depreciation in the pound since the Brexit vote, the WBSFS now predicts a 63 per cent probability that inflation rises above two per cent in 2017 compared with a 21 per cent probability forecast one quarter ago.”

The Warwick Business School Forecasting System is an initiative to place impartial, academically robust macroeconomic forecasts in the public domain.

Instead of using a single forecasting model or relying on the judgement of the Bank of England’s Monetary Policy Committee, the WBSFS combines a group of state-of-the-art econometric models to produce judgement-free macroeconomic forecasts for UK GDP growth and CPI inflation. These forecasts are updated each quarter to reflect the latest data.

By using model averaging, following well-established methods in statistics, meteorology and economics, the WBSFS takes a weighted combination of each models’ forecasts, where higher weights are awarded to models which show the better recent forecasting performance. The WBSFS quantifies and communicates the forecast uncertainties by producing probabilistic forecasts.

Find out more about the Warwick Business School Forecasting System here

Professor 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)

Professor 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.

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

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