No-deal Brexit fear for UK with inflation set to surge ‘above 4%’

Millions of UK households face a painful financial squeeze in a no-deal Brexit as inflation soars above 4%, a leading economic forecaster warned on Monday.

The National Institute for Economic and Social Research’s latest forecasts said the collapse in the pound even in the event of an “orderly” no-deal exit from the EU “would considerably add to price pressures” as the cost of imports soars.

It predicts the Consumer Prices Index would rise to 4.2% next year, the highest for nearly eight years and more than double the Bank of England’s official 2% target.

NIESR’s forecasts come two days before Boris Johnson, who has pledged to leave the EU on October 31 with or without a deal, is all but certain to become prime minister.

If realised, the predictions would also reverse a recent recovery in real-terms pay packets for UK workers, with pay growth at its highest for more than a decade in the quarter to May.

Inflation of over 4% would swamp the 3.6% annual pay rises being enjoyed by British workers, even before a likely rise in unemployment depresses pay.

In a no-deal Brexit the forecaster predicts sterling would fall below $1.20 “with the possibility of an even sharper fall”, hitting its lowest level for more than 30 years against the dollar.

Today the pound was trading below $1.25 after hitting its lowest since April 2017 on no-deal fears last week.

Although spiking inflation should in theory prompt interest rate rises, NIESR assumes the Bank’s rate-setters will act as previously to “look through” temporary episodes of high inflation and slash interest rates by a half a percentage point from the current 0.75%.

Several members of the Bank’s rate-setting monetary policy committee have stressed interest rates were likely to fall as long as inflation expectations remained anchored to the 2% target.