THE BANK of England releases its latest Inflation Report on Wednesday, with economists increasingly divided over the outlook for price pressures in the UK.
Consumer price inflation unexpectedly slowed to four per cent in March, yet official figures released next week could show a rebound for April.
Input costs for manufacturers accelerated to 17.6 per cent last month, up from 14.8 per cent in March, showing that more price pressures are in the pipeline.
“I expect some extra inflationary impact from the low pound, as these things take a long time to come through,” added Henderson’s chief economist Simon Ward.
“And while March’s figure was surprisingly dragged down by weak food components, food inflation has since sped up, according to other surveys,” Ward said.
The Bank expects the consumer price index to drop to around its target level (two per cent) at the beginning of next year, yet admits “the timing and extent of that decline in inflation are uncertain.”
February’s report showed inflation forecasts above the level predicted last November, and this week’s report could show another embarrassing upward revision.
“February’s forecast assumed quite early and significant interest rates, as expected by markets at the time,” said Ward. “But normalisation has apparently been set back, so the inflation forecast may have moved higher.”
Yet many economists remain convinced that inflation will fall back to, or below target in 2012.
“Inflation should fall to three per cent as the VAT effect drops out next January, and continue falling through 2012,” said Nida Ali, an economics advisor to the Ernst and Young Item Club.
The VAT rise added 0.76 per cent to prices, the Office for National Statistics recently calculated.
ECONOMISTS’ VIEWS: WILL CPI INFLATION FALL BY NEXT YEAR?
GEOFFREY WOOD, CASS BUSINESS SCHOOL
There is real danger behind the growing idea that inflation is going to rise quite high and the Bank of England is not taking the threat seriously. The low exchange rate has already caused problems and will continue to contribute to price pressures. Thus in similarly open peer countries, inflation levels are lower. What concerns me is that people keep forgetting how much living standards are being held down by inflation. We have already seen asset price bubbles and commodity price bubles – this too is a serious risk from loose policy.
SIMON WARD, HENDERSON
I see inflation coming down but remaining above target, at around 2.5 per cent from the summer of 2012 into early 2013. This is actually in line with the Bank’s own mean forecast based on unchanged monetary policy, given the balance of risk. I actually think wage pressures are already starting to be felt, moving up by around one per cent from this time last year. My guess is that productivity growth will be slow, 1.5 per cent at best. This means that average earnings growth of just 3.5 per cent should be seen as dangerous.
NIDA ALI, ERNST AND YOUNG ITEM CLUB
We think consumer price inflation will come back down at the beginning of next year, as the VAT effect falls out and commodity prices ease. It should keep falling, down to 2.1 per cent by the end of 2012. In the short run it will rise, although not hitting the dreaded five per cent. We think CPI will peak at 4.6 per cent this year, as surging input costs still have some feeding through to deliver. The downside risks to inflation from spare capacity in the economy are still much greater than upside risks.
DAVID KERN, BRITISH CHAMBERS OF COMMERCE
I expect inflation will come down to target, although not until the second quarter of 2012. The problem is not permanent, but neither is it short term – it will gradually resolve itself, but not quickly. But inflation is either at or near its peak; I don’t think it will go above 4.5 per cent. The UK needs the policies it has at the moment – fiscal tightening and monetary accomodation. I hope they will postpone interest rate increases for as long as possible. In the last couple of months the case for loose policy has actually improved.