Inflation should be back on target by this time next year - ITEM Club

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

  • Higher domestic energy bills are keeping inflation elevated
  • But underlying price pressures remain soft with inflation expected to drop back into line with the 2% target by this time next year
  • No implications for monetary policy since high inflation is still a result of temporary factors

“With the impact of higher domestic energy bills still feeding through to consumer prices, December’s inflation figures were always going to be elevated. The full impact of higher energy prices is yet to be felt, implying that inflation will probably remain high for the next couple of months.
 
“But underlying price pressures are still soft so we continue to expect inflation to drop in line with the 2% target by this time next year. The significant fall in inflation rates over the past twelve months, coupled with an increase in employment, has already helped to ease some of the pressure on household finances. With inflation likely to ease further, we expect the recovery in the consumer sector to develop gradually.
 
“Today’s figures are unlikely to have any impact on monetary policy. The MPC is still able tell a compelling story of temporary factors keeping inflation high and should be able to find room to provide more monetary stimulus if there are further signs that demand is faltering.”