Squeeze on households ‘here to stay’

The Ernst & Young ITEM Club, which uses the Treasury’s model of the UK economy for its forecasts, estimates that persistently high inflation has already knocked almost three per cent off UK growth in the last three years. It expects inflationary pressures to peak over the summer and said it is unlikely the CPI measure will dip below 2.5 per cent over the next four years.

While the UK economy is showing signs of recovery, the Bank of England warned last week that inflation is not expected to fall below its two per cent target until late 2015. New figures tomorrow will show inflation stood at around 2.7 per cent in April.

But the ITEM Club said the Bank was right to stick to its guns by allowing inflation to overshoot and keeping interest rates at an all-time low of 0.5 per cent. ITEM’s senior economic adviser Carl Astorri said the alternative scenario would have seen interest rates rise by 3.5 per cent in 2011, choking off the recovery even earlier and adding an additional 625,000 to the dole queue.

Food prices have risen by nearly 40 per cent since 2007, while businesses and consumers have also had to endure the impact of rising oil and commodity prices, a weakening pound and hikes to VAT.