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he UK economy is set to witness the highest inflation rate of the world’s G7 advanced economies this year, according to new forecasts.
The Organisation for Economic Co-operation and Development (OECD) also increased its predicted average UK inflation rate for 2023 compared with its previous estimate.
Economists at the globally recognised organisation also reduced their UK growth forecast slightly for next year amid pressure from higher interest rates.
Growth across global economies was better than expected at the start of the year but is “expected to moderate” due to the impact of higher borrowing costs, which have been introduced in many countries as part of efforts to grapple inflation.
Activity has already weakened in the euro area and the United Kingdom, reflecting the lagged effect on incomes from the large energy price shock in 2022 and the comparative importance of bank-based finance in many European economies
Last year, the UK saw inflation average at 9.1% over the year, with a peak of 11.1%.
On Tuesday, the OECD said it expects UK inflation of 7.2% for 2023, increasing its previous forecast of 6.9% from June.
This would be the fastest rate across the G7 and third fastest across the G20.
It comes as Prime Minister Rishi Sunak and Chancellor Jeremy Hunt face pressure to meet their pledge to halve inflation by the end of the year.
The latest forecasts also predicted inflation of 2.9% for 2024, reflecting a 0.1 percentage point rise on the previous estimate.
The OECD said inflation across the G20 is expected to be 6% for 2023 – down 0.1 percentage point on its previous forecast- and 4.8% in 2024 – up 0.1 percentage point.
Today the OECD have set out a challenging global picture, but it is good news that they expect UK inflation to drop below 3% next year
It said there is a risk inflation could reduce quicker than expected, with the body highlighting the impact of interest rate hikes on consumer spending and slower activity in China.
Meanwhile, the report held its forecast of UK growth in 2023 at 0.3% for the year. This is predicted to be the second weakest among the G7 and third weakest among the G20.
The OECD also predicted that UK GDP will grow by 0.8% next year.
Despite the potential increase, this represents a 0.2 percentage point decrease on previous forecasts, and is also predicted to be the weakest growth rate across G7 countries.
In its report, the OECD said: “Activity has already weakened in the euro area and the United Kingdom, reflecting the lagged effect on incomes from the large energy price shock in 2022 and the comparative importance of bank-based finance in many European economies.”
The report comes two days before the latest Bank of England meeting, where policymakers could move to increase interest rates once again.
Our ‘inaction man’ Prime Minister is too weak to turn things around, while his predecessor, Liz Truss, calls for even more uncosted policies that crashed the economy this time last year
On Tuesday, Clare Lombardelli, chief economist of the OECD, said: “The UK has seen slightly higher inflation than previously expected.
“The Bank of England, as with other central banks around the world, is right to be very vigilant about the data and what it is showing.
“They are taking the right action in raising rates to this point and then assessing the data for future decisions.”
In response to the report, Chancellor of the Exchequer Jeremy Hunt said: “Today the OECD have set out a challenging global picture, but it is good news that they expect UK inflation to drop below 3% next year.
“It is only by halving inflation that we can deliver higher growth and living standards.”
Shadow chief secretary to the Treasury Darren Jones said: “Today’s economic forecasts show that the Tories are delivering more of the same.
“Our ‘inaction man’ Prime Minister is too weak to turn things around, while his predecessor, Liz Truss, calls for even more uncosted policies that crashed the economy this time last year.”
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