Inflation - steady as she goes

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Data released this morning showed that consumer price inflation was stable at 2.8% in the 12 months to March.

Although this was in line with what forecasters expected to see, it is some way above the level of inflation forecast even at the beginning of this year. In January, we forecast that inflation would come in at about 2.5% in the three months to March. In January 2012, we thought inflation would be at 1.7% by now.

One of the key reasons inflation has been higher than expected is the unforseen depreciation of sterling that we've seen since the start of the year. As I laid out in a blog back in January, a weaker sterling means more expensive imports, and is therefore likely to add a few percentage points to inflation.

Some of the other reasons inflation in 2013 may well be higher than previously expected include:

  • an unexpectedly large increase in petrol prices at the start of the year, caused by a combination of higher crude oil prices and a weaker pound
  • higher domestic energy prices that have been announced in the past few months
  • changes to the MPC's remit that increase the chance of QE and could therefore intensify downward pressure on sterling

For now, our forecasts suggest that inflation will fall back to the Bank of England's target of 2.0% in late 2013/early 2014, but as the constant upward revisions to inflation forecasts have shown – and as Macmillan may or may not have said – that rather depends on 'events, dear boy, events'.

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