Slow consumer spending and rising inflation to dog UK's two-year Brexit talks

Slowing consumer spending and rising inflation will keep the UK economy under pressure over the coming two years of Brexit talks, according to a new report.

"We expect consumer spending to remain weak throughout this year and next as rising inflation erodes the purchasing power of households," said the respected National Institute of Economic and Social Research (NIESR) in its May report. The economic group called consumer spending "the engine" of the economy in 2016.

It forecasts Britain's gross domestic product will grow at 1.7% and 1.9% this year and in 2018, while the UK negotiates its exit from the European Union.

The report comes as the Bank of England is expected to nudge down its growth outlook and keep interest rates on hold on Thursday (11 April) following a faltering start to the economy at the beginning of the year.

The Bank's nine-strong Monetary Policy Committee (MPC) are expected to keep rates on hold at 0.25% this week following official figures estimating growth more than halved to 0.3% in the first quarter, from 0.7% growth in the final three months of 2016.

Minutes of the interest rates meeting and the accompanying quarterly inflation report will be watched closely for the Bank's thoughts on the economy amid signs of a consumer spending downturn on the high street.

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It is thought the Bank will make a marginal downgrade to its forecast for 2% growth this year after the first quarter disappointment, and may also tweak its inflation forecasts higher.

Inflation hit a higher-than-forecast 2.3% in February, and despite the recent partial rebound in the value of the pound since the snap general election was announced last month, many economists estimate prices will rise throughout the year.

NIESR said consumer spending on retail and transport slowed down sharply in the first three months of this year, pegged back by rising inflation as prices lifted due to the overall fall in the value of the pound following June's Brexit vote.

Simon Kirby, head of macroeconomic modelling and forecasting at NIESR, said: "Gross domestic product growth over the next couple of years will be subdued, growing at less than the economy's long-run potential rate of 2% per year, but households will feel the pinch from rising consumer price inflation."

The economic group forecast inflation will peak at 3.4% in the final three months of this year, before gradually returning to the Bank of England's 2% target.