ITEM Club says inflation figures will be music to the ears of the MPC

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Andrew Goodwin, senior economic advisor to the EY ITEM Club, comments on today’s inflation figures:

  • These figures will be music to the ears of the MPC
  • The Governor may still have to write another letter to the Chancellor in June
  • But we still expect inflation to be back close to the 2% target by the end of the year

“These figures will be music to the ears of the MPC. After a brief delay, caused by the spike in oil prices, we are now seeing the temporary factors, which had caused inflation to remain elevated last year, dropping out of the calculation and bringing inflation rates down.
 
“However, while the Governor has escaped having to write another open letter this month, there is still a chance that he will have to pen another in June. These figures were heavily influenced by Easter being earlier this year, with the impact on air and sea fares reducing inflation by almost 0.3%pts, but we would expect this to reverse next month. On the flip side, the plunge in petrol prices – by around 5 pence per litre since mid-April – should help to mitigate the impact on headline inflation rates.
 
“And other factors also point to inflation rates coming down over the next few months. Non-oil commodities prices have also dropped back, causing producer input cost inflation to slow sharply, and this should feed along the supply chain as we move through the summer. The recent rise in sterling will also help in this respect, magnifying the impact of the falls in dollar-denominated commodity prices.
 
“Overall, today’s data strengthens our conviction that inflation will be back close to the 2% target by the end of the year. This in turn should give the MPC the full flexibility to react, and provide extra monetary stimulus, should the situation warrant it.”