Inflation embarks on temporary upward path - Ernst & Young - United Kingdom

• Today’s increase in inflation is a reflection of base effects arising from the plunge in oil prices last autumn. This is currently offsetting downward pressure arising from the high degree of spare capacity.
• As these base effects continue to take hold, inflation is expected to edge up in the coming months, while the reversal of the VAT cut will cause inflation to spike temporarily in December-January.
• With monetary policy set to keep inflation at the 2% target in the medium term, we do not anticipate any tightening of policy to dampen this short-term phenomenon. Indeed, beyond January, inflation should continue on a downward path well into 2010.

"Consumer price inflation increased from 1.1% in September to 1.5% in October, reflecting base effects arising from the plunge in oil prices last autumn. Last year the price of fuels and lubricants fell 6.1% between September and October whereas this year the fall was just 0.7%.

"This combined with the persistent weakness of sterling which is keeping import prices high, are currently offsetting the downward pressure arising from the high degree of spare capacity. Even once volatile items such as food, energy and alcohol and tobacco are stripped away, underlying inflation remains sticky; core inflation edged up 0.1% in October to 1.8%.
 
"In the coming months, as the base effects continue to take hold, inflation is expected to edge up, while the reversal of the VAT cut will cause inflation to spike temporarily in December-January.

"With monetary policy set to keep inflation at the 2% target in the medium term, we do not anticipate any tightening of policy to dampen this short-term phenomenon.

"With earnings growth very weak, the usual wage-inflation pressure is not present, and beyond January, inflation should continue on a downward path well into 2010."