Bank of England reckons inflation will soon top 3%

The Bank of England warned today that inflation is set to remain above its target and keep rising for another few years, despite efforts to keep a lid on it.

by Michael Northcott
Last Updated: 19 Aug 2013

If you thought the inflation situation was stable – yesterday we found out that it has stayed level at 2.7% for four months in a row – think again. In its quarterly inflation report, the BoE has predicted that inflation will rise to 3% or more by this summer, and it will definitely stay above the 2% target for at least another two years. 

But governor Sir Mervyn King said that the Bank expects a ‘slow, but sustained recovery’. He said: ‘There is cause for optimism. Today…the recovery is in sight. Although output has been broadly flat for the past two years, that masks a more encouraging underlying picture.’ He did clarify that the road ahead will probably not be ‘smooth’, and the BoE forecast actually means that inflation will not return to its pre-crisis levels until at least 2016. So we’re certainly not out of the woods, yet.

And what about GDP?  It probably hasn’t escaped your notice that the UK economy contracted 0.3% in the final quarter of 2012, so if we get more contraction in Q1 of this year, we’ll be triple-dipping the economy in a pit of fiscal cess. On this issue, King simply reiterated his point about the future looking brighter. 

But the CBI seems to corroborate his positivity: it said today that it doesn’t expect us to be plunged back into recession. Unfortunately it revised down its growth expectations for 2013 from 1.4% to 1%, but any growth has to be better than the dreaded triple-dip, right?

So, what next? Well, Merv says that the BoE is ready to step in with more help for the economy (presumably that means quantitative easing), but said that the benefit of pumping more cash into the financial system was limited. He said: ‘We must recognise that there are limits to what can be achieved via general monetary stimulus, in any form, on its own.’

Of course, Mervyn King has become almost Orwellian in his ability to explain a load of bad-sounding metrics to rooms full of people, whilst simultaneously insisting that recovery is definitely on the way. Still, he’s on his way out soon, to be replaced by Canadian Mark Carney, who has already mooted the idea of the BoE targeting an alternative metric to inflation. We’ll have to wait and see if he does anything so bold…

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