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UK set for peak inflation among G7 in 2024-2025 – OECD

February 8, 2024

New forecasts suggest Britain will experience the highest inflation among G7 nations in 2024 and 2025, despite a slower rise in living costs.

The Organisation for Economic Co-operation and Development (OECD) has adjusted its projections for headline inflation in the UK, now anticipating averages of 2.8% in 2024 and 2.4% in 2025. These figures represent a slight downward revision from the previous forecasts of 2.9% and 2.5% respectively, as reported in November.

But this would still see the UK suffer the highest level of inflation of all the G7 countries in both 2024 and 2025.

In 2024, it is predicting UK inflation to be above Canada at 2.6%, France at 2.7%, Germany at 2.6%, Italy at 1.8%, Japan at 2.6% and the United States at 2.2%.

And while the OECD said inflation is projected to be back to target across most G20 countries by the end of next year, it warned over the risk to inflation globally from geopolitical tensions and the Red Sea shipping disruption.

It also downgraded its UK growth forecast for 2023 to 0.3% from 0.5% previously predicted in November, but held firm on its forecasts for Britain’s gross domestic product (GDP) to expand by 0.7% in 2024 and 1.2% in 2025.

The OECD said central banks could start to lower interest rates in 2024 and sooner than it had predicted in November, although it warned that monetary policy must be “prudent”.

It added that it is “too soon to be sure that underlying price pressures are fully contained”.

OECD secretary-general Mathias Cormann said: “Monetary policy needs to remain prudent, though central banks could start to lower interest rates this year, provided that inflation continues to ease.

The organisation flagged concerns over the Israel-Gaza conflict and attacks on ships in the Red Sea by Houthi rebels, which has seen US and UK forces respond with strikes against the rebels.

“High geopolitical tensions are a significant near-term risk to activity and inflation, particularly if the conflict in the Middle East were to disrupt energy markets,” it said.

“A widening or escalation of the conflict could disrupt shipping more extensively than presently expected, intensify supply bottlenecks, and push up energy prices if traffic is interrupted in the key routes for the transport of oil and gas from the Middle East to Asia, Europe and the Americas,” it added.

The Bank of England last week also flagged worries over the Red Sea attacks in affecting the outlook for inflation, though it said the impact to the UK has so far been small.

The Bank signalled on Thursday as it kept interest rates at 5.25% that it could start thinking about cutting borrowing costs this year, though it also stressed the job of reining in inflation is not done.

In its latest report, the OECD said global central bank policies “should remain restrictive for some time to come”, suggesting that policymakers should not cut rates too quickly or too far.

Its growth forecasts see the UK with the joint third weakest expansion of the G7 countries, falling far short of the 2.1% pencilled in for the US.

Germany is set for the weakest expansion in the G7 this year, at just 0.3%, followed by France at 0.6% and then both the UK and Italy at 0.7%, according to the OECD.

Source: The Standard
Image: The Astana Times, iExpats