Inflation is likely to fall back to the 2% target by the autumn - ITEM Club

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Nida Ali, economic advisor to the EY ITEM Club, comments on today’s CPI inflation figures:

  • The fall in December’s inflation rate is in line with expectations
  • This should gather pace over the next few months as various temporary factors fall out of the calculation
  • Inflation is likely to be back to the 2% target by this autumn, providing some respite to hard-pressed families

“These figures are in line with expectations, and inflation is likely to continue easing in the months ahead. With prices increasing very rapidly around this time last year, base effects are the main driver behind the steep fall in the inflation rate.

“This should gather pace over the next couple of months with other temporary factors, most notably the VAT rise, falling out of the year-on-year calculation in 2012. Surging global commodity prices have also now stabilised – and in some cases fallen back – and will therefore reduce the pressure on domestic inflation. The modest declines in utility prices announced this week will help, although they represent only a fraction of last year’s increase, while retailers are being forced to discount heavily in the face of weak demand.

“We expect CPI inflation to be back at the 2% target by this autumn and, while we’re not convinced that it will fall back as far as the Bank of England forecasts, there should still be plenty of room for the MPC to loosen monetary policy further this year. This will also provide some welcome respite for hard-pressed families who have struggled with falling real wages over the past few years.”

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