ERNS over inflation at the Bank of England will come to the fore this week, when the Monetary Policy Committee releases minutes of its December meeting on Wednesday.
Forecasts for inflation levels in 2011 need to be revised upwards again, financial consultants Fathom said.
“On balance, we still think the inflation overshoot will prove temporary and is not an indication of excess demand,” Fathom said. “And yet here we are once again, revising up our short term forecast.”
Consumer price index inflation will average 3.4 per cent next year, Fathom estimates.
Last week a Bank of England survey showed that people expect inflation to hit 3.9 per cent in 2011. Sixty-one per cent say this will weaken the economy.
Price pressure will increase further in the new year when VAT increases to 20 per cent on 4 January.
If inflation remains above the target level of two per cent, Bank governor Mervyn King will be obliged to write more letters to chancellor George Osborne explaining the failure to keep inflation in check.
“The amount of spare capacity in the economy is uncertain,” said George Buckley of Deutsche Bank, “which makes forecasting inflation exceptionally tricky.”