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- Title
Inflation is on the rise, but how far will it go?
- Abstract
September's sharp rise in inflation is likely to mark the start of a steep ascent, which will likely see the CPI measure peaking above 3% in the middle of next year. The initial momentum will come through base effects but the main thrust will come from the pass-through of the sharp depreciation of the pound. However, inflation is likely to then fall back rapidly in 2018 to average 2.2%., The CPI measure of inflation reached a near two-year high in September. This was partly a function of last autumn's sharp falls in petrol and energy prices dropping out of the calculation, but it also reflected a continuation of the recent pickup in core pressures., The degree to which inflation accelerates from this point will depend upon the pass-through of the weaker pound. The literature suggests that the maximum impact on inflation will come after a year, but there is some variation in the estimates of the degree of pass-through. Studies conducted over a long period suggest the degree of pass-through may have become smaller over time., We expect the weak economic backdrop to limit the extent to which the weaker pound pushes up inflation, though we still see the CPI measure averaging 2.7% in 2017, with a brief period in the middle of the year where inflation exceeds 3%, hastening a letter of explanation from the Governor of the Bank of England to the Chancellor. However, we would not see this prospect as a serious impediment to a further rate cut, given that the MPC has made it clear that it is prepared to tolerate such an overshoot., Inflation should then drop back through 2018 as sterling recovers and the 2017 acceleration provides powerful base effects. This is somewhat at odds with the Bank of England's latest forecast, which shows inflation lower in 2017 but then accelerating in 2018, implying a much more protracted pass-through.
- Subjects
PRICE inflation; INFLATION forecasting; ECONOMICS; CONSUMER price indexes; FOREIGN exchange; DEPRECIATION
- Publication
Economic Outlook, 2016, Vol 40, Issue 4, p25
- ISSN
0140-489X
- Publication type
Article
- DOI
10.1111/1468-0319.12246