Inflation is set to remain low for the rest of 2016 and throughout 2017, with a near certainty that it will not rise above 1%, according to Warwick Business School.
Based on projections from its forecast system, the Business School also expects the UK economy to grow 2-3% over the next two years.
Any economic uncertainty associated with Brexit has not as yet changed the balance of risks to economic growth relative to our forecasts a quarter ago. This contrasts with recent downward revisions to forecasts from the IMF and the Treasury's panel.
The WBS estimates only a 2% chance of growth of less than 1% in 2016; and an 11% chance of growth of less than 1% in 2017. But a vote to exit the EU could significantly change these forecasts.
The risks to inflation in 2016 and 2017 continue to be on the downside. It is now a near-certainty that inflation will be less than 1% for 2016 as a whole. In 2017, there remains a three-in-five chance of inflation of less than 1% and a one-in-four chance of deflation.
Instead of using a single forecasting model or relying on the judgement of the Bank of England’s Monetary Policy Committee, the WBS combines a group of state-of-the-art econometric models to produce judgement-free macroeconomic forecasts for UK GDP growth and CPI inflation. These forecasts are updated each quarter to reflect the latest data.
By using model averaging, following well-established methods in statistics, meteorology and economics, the WBS forecast system takes a weighted combination of each models’ forecasts, where higher weights are awarded to models which show the better recent forecasting performance. The WBSFS quantifies and communicates the forecast uncertainties by producing probabilistic forecasts.
Professor Ana Galvao, of the Economic Modelling and Forecasting (EMF) Group at WBS, said: “Any economic uncertainty associated with Brexit has not as yet changed the balance of risks to economic growth relative to our forecasts a quarter ago. This contrasts recent downward revisions to forecasts from the IMF and the Treasury's Panel."
Professor Anthony Garratt, of the EMF Group at WBS, said: “The WBSFS is more confident than the Bank of England and Treasury panel that the current low inflation rates in the UK will persist through 2016 into 2017. There is between a 72% and 85% chance that inflation falls below their central expectations for 2017.”
