Inflation is up again, but for how long?

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Figures released today showed that inflation was up again.

CPI ↑

4.5%

Following last week's inflation report, in which the Bank revised its near-term forecasts for inflation up, this was perhaps to be expected. Forecasts made even before this data was released suggested that CPI inflation will average around 4.3% in 2011.
The Bank of England currently still expects inflation to fall back in 2012 as the effects of VAT, past commodity price rises and exchange rate depreciation fade away.
Upside risks:
As we have previously noted high inflation can lead to higher wage expectations, and therefore higher pay settlements this could drive further inflation. With this in mind, the MPC will be keeping a careful watch on pay settlements. And so will this blog. Tomorrow ONS will release its data on average weekly earnings and EEF's own pay settlements figure will also be made available.
Downside risks:
In the Bank's inflation report last week, it was noted that the weak growth seen in the last six months could bear down on inflation. This has been Adam Posen's line for several months, and he has consequently continued to vote for extended QE. Posen is giving a speech later today. He may argue that weaker-than-expected growth has vindicated his case for looser monetary policy, but will he say the same about the-higher-than-expected inflation?

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