Larger than expected rise points to inflation topping 3% in the second half of 2017 - EY ITEM Club comments

21 March 2017

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  • A modest upside surprise on inflation…
  • …but the broad story remains the same, with inflation set to top 3% in H2 2017
  • The Government is on track to undershoot the OBR’s borrowing forecast

Martin Beck, senior economic advisor to the EY ITEM Club, comments:

“CPI inflation continued to accelerate in February, rising from 1.8% to 2.3%, the highest rate in three and a half years. February’s larger than expected pickup was mostly due to the unwinding of January’s unusual seasonal movements in clothing prices and a sizeable contribution from petrol, which had seen prices rise between January and February this year but fall over the same period in 2016.

“We continue to expect inflation to accelerate as we move through the year. Though the worst of the base effects from last winter’s fall in the oil price are now behind us, the recently announced rises in domestic energy bills will hit the index over the next couple of months. And the effects of the weaker pound should continue to feed through this year, taking inflation above 3% towards the end of 2017.

“Separately, public sector net borrowing came in at £1.8bn in February, £2.8bn lower than a year earlier. With January’s surplus also revised up, the Government is on track to see borrowing come in around £1bn lower than the OBR’s full-year forecast of £51.7bn. Although experience tells us that there could still be some substantial revisions to the historical data over the coming months.”