The Ernst and Young Item Club has forecast inflation sticking above 2.5 per cent for another four years – contrary to the latest forecasts from Threadneedle Street, which hope inflation will be back to the Bank’s two per cent target by 2015.
Item also indicated that the consumer price index (CPI) may peak above three per cent this summer, as Mark Carney replaces Sir Mervyn King as governor of the Bank of England.
It primarily blames rising commodity prices, higher VAT and unconventional monetary policy for higher inflation.
The forecasting organisation claimed that above-target inflation has helped to undermine the country’s fragile economic recovery for the past three years, stripping as much as three per cent from potential growth.
Chancellor George Osborne changed the remit for the Bank’s monetary policy committee (MPC) in March, giving it the power to publicly promise low rates for long periods of time. This tool has been used by the Bank of Canada during Carney’s time at the helm.
However, the Item Club’s senior economic adviser Carl Astorri is sceptical: “As well as becoming a risk to the MPC’s credibility, persistent levels of high inflation may tie their hands when it comes to creating a more flexible system”.