The CBI has also trimmed back its forecast for this year's rate of GDP growth by 0.2% putting GDP growth at 1.8% this year.
The forecast for next year has also been downgraded to 1.7% GDP growth, compared with the Chancellor's more optimistic forecast in the Budget earlier this month of between 2.25% and 2.75%.
According to the CBI, the rate of inflation is expected to peak at 3.2% in Q3 of 2008, but due to the slowing economy, it predicts that Bank of England will cut interest rates in the second and fourth quarters of this year, with one further reduction early next year, bringing interest rates down to 4.5% by early 2009.
CBI Director-General Richard Lambert said: "We are facing a financial shock on a scale not experienced in recent times, which is coming on top of already slower growth. Outside the financial and property sectors the overall mood of business is, however, nothing like as gloomy as you might guess from reading today's headlines. While there are signs of a high street slowdown and some firms say it's getting harder to raise bank finance, around the country many still report quite positive conditions...Our flexible labour market is a real force for stability and our best bet is still that our economy will continue to show modest growth this year and next, before starting a gradual recovery."