Inflation will stay "stubbornly high" this year, pressuring the Bank of England to up interest rates from the second quarter, the Confederation of British Industry (CBI) says.
Rising energy and commodity prices coupled with higher VAT has fuelled inflation, with the CBI predicting it will average over 4% in the first three months of this year - far exceeding the BoE's 2% target for a second year running.
The CBI predicts monetary policy will start to be normalised in the spring, with interest rates edging up to reach 2.75% by Q4 2012.
A gradual interest rate rise along with the VAT increase falling out of CPI figures next year means inflation will fall close to target throughout 2012.
Ian McCafferty, chief economic adviser at the CBI, says: "The economic outlook remains subdued, and conditions for the consumer will be tough for some time to come. But the economy will grow in the coming two years and, despite the recent shock of the estimate for GDP in Q4 2010, we do not foresee a double-dip recession.
"What remains the case is growth at this stage is far less robust than we would normally expect for the second and third year of an economic recovery.
Although the CBI forecasts the UK economy will grow this year, the industry body concedes it will be at a slow pace.
Bad weather in December has dragged down this year's predicted GDP growth rate to 1.8% from 2%. The CBI has forecast slightly faster growth of 2.3%, although this figure is still down from the 2.4% figure from December.
John Cridland, director general, says: "The early estimate for GDP growth in the final quarter of last year came as a surprise to everyone, suggesting that underlying growth may have been weaker than previously thought.
"We must wait and see just how weak it was, and how much was down to December's bad weather, but we do expect growth in 2011, albeit rather anaemic and sluggish, which will accelerate during 2012.
"With household spending under some considerable strain, we will be looking to business investment and exports to help deliver economic growth over the coming two years.
"While this growth will still be lower than the long-term average and unemployment will continue to creep up, job numbers will also increase as the recovery picks up."
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