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U.K. inflation could increase to four per cent this year: Resolution Foundation

A think tank is forecasting an increase in inflation that would be equivalent to reducing average household incomes by £700 (1,205.40 CAD), causing concern surrounding planned cuts to universal credit

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The U.K. government should make preparations for the possibility of inflation eroding household living standards, says the Resolution Foundation, a think tank.

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Inflation is currently trending upwards by four per cent in the next few months, according to research from the Resolution Foundation. The think tank says this inflationary increase could be equivalent to reducing real average household incomes by £700 (1,205.40 CAD). The think tank adds that Bank of England monetary policymakers need to take action to protect family incomes.

“With the U.S. experiencing the fastest rise in inflation in nearly half a century, and the UK also experiencing sharp increases, many people are getting increasingly worried about a possible price spiral,” said James Smith, a research director at the Resolution Foundation, in a press release.

The Macroeconomic Policy Outlook, which analyses macroeconomic policy and its effects on low to middle-class people, published by the think tank concludes that the Bank of England should “look through” the temporary inflation increase and avoid a premature interest rate increase. The Foundation also warns that the government’s plan to reduce Universal Credit, a government payment to help with living costs, in October by £20 (34.44 CAD) each week could adversely affect the approximately six million people who relied on universal credit last month. This is because the cut would occur at a time of heightened inflation and temporarily depressed household incomes.

“The temporary nature of this inflation spike means the Bank can look through it and avoid premature rate rises. But the £700 hit to living standards it will bring means households and the Government cannot afford to ignore it,” added Smith.

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Founded in 2005, the Resolution Foundation is an independent think tank operating with a mandate to improve living standards for low-to-middle earners. Research areas for the foundation include incomes and inequality, jobs, skills, compensation, housing, wealth, debt, tax, public finances and the economy.

The group’s research also compared inflationary pressures in the U.K. with the U.S. and investigated how policymakers should address inflation that rises above targets. The Outlook states that the U.S. Consumer Price Index inflation increased from 0.1 per cent in May 2020 to five per cent in May 2021, which was the sharpest increase in 50 years, while the U.K. has experienced the sharpest six-month inflation rise since the aftermath of the financial crisis.

The Macroeconomic Policy Outlook adds that U.K. inflation generally has mirrored trends in the U.S. over the course of the last decade. However, the report also said that inflationary pressures in the U.K. present a less severe problem than the U.S., and notes that the U.S. is increasing fiscal stimulus while the U.K. is scheduled to reduce support, including ending business rates relief.

The Foundation says that a four per cent increase later this year would more than double the forecasted figures set by the Bank of England for the third quarter of 2021. The report calls on the U.K. government to re-evaluate its decision to reduce support in order to strengthen the economic recovery, which is being challenged by a squeeze on household income.

“The Chancellor can start by cancelling the planned cut to Universal Credit this Autumn, which will only add to families’ financial pressures. A squeeze on household incomes later this year, even if temporary, is a significant threat to the strength of our current recovery,” Smith said.

Andy Haldane, a departing chief economist at the Bank of England, said previously this month that the “beast of inflation is stalking the land again,” and that the U.K. currently faces a “dangerous moment,” the Guardian reported.

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