Consumer spending growth set to grind to a halt, think tank warns

Consumer spending growth will grind to a halt by 2018 as inflation is set to surge close to 3.5% by the end of the year, an influential think tank has warned.

The National Institute of Economic and Social Research (NIESR) cautioned over the squeeze on household finances as wage rises will not keep pace with rocketing inflation.

It said consumer prices index (CPI) inflation will peak at 3.4% in the final three months to 2017 - the highest level since early 2012 - before gradually easing back towards the bank's 2% target.

But it forecasts that interest rates will remain on hold at 0.25% until mid-2019 as the Bank of England is expected to "look through" the jump in inflation.

Simon Kirby, head of macroeconomic modelling and forecasting at NIESR, said: "Households will feel the pinch from rising consumer price inflation.

"The rate of inflation is expected to rise from 2.3% per annum in March to almost 3.5% by the end of 2017.

"By 2018 we expect consumer spending growth to have effectively stalled."

The sharp slowdown in growth to 0.3% seen in the first three months of 2017 was a sign that higher prices are already taking their toll, it cautioned.

NIESR said: "The slowdown can be largely attributed to a softening in service sector output, consistent with a moderation in consumer spending, which was the engine of growth in 2016.

"We expect consumer spending to remain weak throughout this year and next as rising inflation erodes the purchasing power of households."

NIESR held its forecasts for growth firm on earlier predictions, saying it expects expansion to ease back to 1.7% over the whole of 2017 from 2% in 2016, before rising to 1.9% in 2018.

The forecasts come ahead of the Bank's latest interest rate decision and quarterly inflation report on Thursday, which is expected to see it nudge down its growth outlook after the economy faltered in the first quarter.

Policymakers on the Bank's nine-strong Monetary Policy Committee (MPC) are set to keep rates unchanged at 0.25%.

Outgoing rate-setter Kristin Forbes is likely to repeat her call for a hike to 0.5% after breaking rank in March on fears over surging inflation, which marked the first split decision since last July.

But most economists believe she will remain the lone dissenter after the worse-than-expected gross domestic product (GDP) reading, which came after 0.7% growth in the previous three months.