EY ITEM Club
special report on inflation

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In the 10 years to 2007, the Bank of England’s independent stewardship over monetary policy saw the UK enjoy the NICE decade – non-inflationary constant expansion. But now persistently high inflation is back, driven by a combination of global and domestic factors such as higher food prices and higher administered and regulated prices. As a result, headline Consumer Price Index (CPI) inflation is set to move above 3% this summer – albeit briefly – and then to remain above the Chancellor’s 2% target for the foreseeable future.

While inflationary pressures should cool in the Autumn, as domestic energy and food prices rise by less than they did at the same time last year, it’s unlikely that CPI inflation will dip below 2.5% before 2016. Meanwhile inflation as measured by the Retail Price Index (RPI) will remain above the CPI throughout the period, and start to accelerate away from CPI in 2015 and 2016 as housing costs increase.

By the time the effect of rising university tuition fees drops out of the inflation calculation in late 2015, underlying inflationary pressures will be building again, as a stronger economy improves workers’ wage bargaining powers and firms’ ability to raise prices.

Peter Spencer, Senior Economic Adviser to the ITEM Club


UK: Contributions to CPI inflation

UK: Contributions to CPI inflation

Source: Haver Analytics/ITEM Club


The ITEM Club inflation forecast

% changes on previous year unless specified

 

2000-09

2010

2011

2012

2013

2014

2015

2016

CPI

1.8

3.3

4.5

2.8

2.9

2.6

2.6

2.5

Food and non-alcoholic drinks

2.9

4.0

6.3

4.0

5.0

3.4

2.8

2.5

Electricity, gas, etc

7.9

-2.8

9.9

8.0

7.4

3.9

4.2

4.0

Transport costs

3.6

16.7

14.7

2.0

-1.3

2.5

4.4

4.6

Other

1.4

2.9

3.2

2.3

2.3

2.3

2.3

2.2

RPI

2.6

4.6

5.2

3.2

3.2

3.2

3.7

4.3

Mortgage interest payments

1.7

0.5

3.1

2.3

4.2

5.0

15.6

23.4

Housing depreciation

7.6

5.9

-0.9

0.4

1.2

1.9

4.9

6.0

Assumptions:

 

 

 

 

 

 

 

 

Oil price ($ per barrel)

49.6

79.5

111.3

111.7

106.0

108.1

113.0

116.3

US$/£ exchange rate

1.70

1.55

1.60

1.59

1.52

1.49

1.47

1.46

Bank rate (%)

4.33

0.50

0.50

0.50

0.50

0.50

1.02

2.02

Source: ITEM Club