Inflation may have peaked but it’s unlikely to dip below 2% in foreseeable future – EY ITEM Club

13 August 2013

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

  • Inflation is likely to have peaked and will probably continue easing over the next few months
  • But it is going to be difficult to get back to the 2% target in the foreseeable future

“Base effects had pushed the annual inflation rate up in June so it was always likely to unwind in July. But inflationary pressures seem to have eased, given that the price level stagnated on a month-on-month basis.

“Inflation has most likely peaked and will probably continue easing over the next few months. There is little sign of any inflationary pressure from the supply pipeline and, with global growth disappointing, commodity prices might soften further, therefore exerting a further downward pressure on prices.

“Nevertheless, we see inflation remaining above the 2% target for the foreseeable future. Accounting for the persistence of higher inflation in administered & regulated prices and the end of deflation in imported goods prices, inflation will probably settle at around 2.2% in 2014 and 2015. But this is still some way below the Bank of England's 2.5% inflation knockout so the Bank can focus on getting unemployment down below 7% and keep rates at 0.5% until at least 2016.”