Households will see their spending power curbed “substantially” as the Brexit-hit pound will send prices soaring over the next two years, an influential think tank has warned.
The National Institute of Economic and Social Research (NIESR) said the consumer spending surge that has helped prop-up growth since the Brexit vote is set to end as higher inflation sets it.
It believes the economy grew by 0.4% in the three months to November, in line with growth seen in the previous three months.
But NIESR expects next year to be a painful one for the economy, with growth set to slow sharply and inflation to quadruple.
In its quarterly forecast in November, NIESR predicted the plunging pound would send inflation shooting up to 3.8% in late 2017.
Consumer prices index inflation currently stands at 0.9%.
It predicts growth will also slow dramatically to 1.4% in 2017 from an estimated 2% in 2016.
Rebecca Piggott, a research fellow at NIESR, said: “Recent economic growth has been driven almost entirely by the UK’s broad service sector, supported by robust consumer spending.
“Looking ahead, we do not expect such buoyant consumer spending growth to persist.
“Sterling’s pronounced depreciation this year is expected to pass through to the consumer prices throughout the course of 2017 and 2018, eroding the purchasing power of households substantially.”
Figures out separately from the Office for National Statistics confirmed the woes being felt in other areas of the economy, with a shock 0.9% slump in manufacturing output in October.
This was a sharp reversal of the 0.6% rise seen in September, while economists had expected growth of 0.2%.