The economy is expected to grow more quickly than previously believed this year despite rising energy costs, a new report predicts today.
The CBI also predicts that the rate of inflation will exceed its two per cent target because of high power bills.
But the business organisation argued against interest rate rises because energy prices were set to stabilise and domestic pressures would remain under control.
Improved exports would help manufacturing firms, while the service sector would continue to perform "robustly", says the report.
The upward revision in annual GDP growth for 2006 - up 0.1 per cent on March's forecast - is based on a stronger international economic performance than previously assumed, a corresponding demand for UK goods and services exports, and the greater government consumption revealed by the Treasury in the spring.
An improved export situation compared to 2005 will help manufacturing output grow by one per cent in 2006 and by 0.7 per cent next year, the CBI forecasts.
This compares with a contraction of 1.1 per cent last year. The largest part of the UK economy, the service sector, will continue to perform robustly, with a predicted growth rate of 2.7 per cent this year and 2.8 per cent in 2007.
Household disposable income, in real terms, is expected to grow modestly, at 2.1 per cent in 2006.
Household consumption growth is expected to grow at 2.2 per cent in 2006, and 2.3 per cent the following year.
It will be helped by improvements in the housing market but rising unemployment - a forecast borne out by last week's unemployment figures - will constrain average earnings growth and suppress willingness to spend.
Total fixed investment for 2006 and 2007 is forecast to grow slightly more slowly than expected in March as projected government investment is much weaker for both years. Business investment growth will be modest by past standards, although up on March's forecast.
CBI chief economic adviser Ian McCafferty said: "The economy is now expected to grow slightly more quickly in 2006 than we previously thought, reflecting the better prospects for exports and greater government consumption.
"There will also be some of the long-desired rebalancing in the economy through 2006 as household consumption remains constrained and government spending slows relative to recent years, with growing export demand offsetting these factors.
"The trade-off between growth and inflation, though, worsens in 2007.
"Inflation, in consumer price terms, will stay above the two per cent target to the end of 2007, although by the second half of the year it will ease back towards this level.
"Energy prices have rocketed but core inflation pressures are expected to be limited by the low growth of wage settlements, rising unemployment, and the limited ability of businesses to pass higher costs on to customers.
"Given the temporary nature of the inflation overshoot, the Bank can still deliver its inflation mandate without the need to change base rates."