Inflation at 5.2% - where’s it going next?

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The Governor of the Bank of England believes inflation is heading down. And, as Chris Dillow's article on Investors' Chronicle today points out,

It's highly likely that inflation will fall a lot next year. Basic maths tells us as much.

He's referring to the statistical composition of the inflation data, which means that over the course of the next year the impact of VAT and energy price rises will fall out of the measure and bring inflation down.

There are other – non-mathematical – reasons to believe that inflation might fall in the coming months too. Global economic weaknesses are likely to hold down the demand pressures that would ordinarily push up prices.

But, as Dillow points out, there is an alternative view that inflation could still rise. As Jeremy Warner over at the Telegraph notes:

The problem with inflation, repeated historical experience has demonstrated, is that once out of the bag, it is extremely difficult to put back in. There is only so much wage erosion through inflation that people will take before they start to demand compensating pay rises.

Also – as both writers add – in the medium term inflation is likely to be pushed up by the recent extension of quantitative easing.

The question remains: which of these factors is likely to play a bigger part? We will know the Monetary Policy Committee's view of this when they release their minutes tomorrow morning.

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