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UK inflation: what the economists say

City experts believe inflation will keep climbing for the next few months, after the consumer prices index rose to 4.5% in August

Andrew Goodwin, senior economic advisor to the Ernst & Young Item Club

There is probably worse to come in the short-term as the contribution from higher utility bills was surprisingly small in August, given the scale of the price rises announced by the energy companies. We suspect that the effects of higher energy bills will continue to feed through in the September figures and, with unfavourable base effects also due to come into play, we could still see inflation breach the 5% barrier.

But in broader terms, this release is telling us that persistently weak economic growth has suppressed core or domestically generated inflation pressures, and it’s really the temporary factors – VAT, fuel costs and now utility bills – that are keeping inflation high.

Given the deterioration in the growth outlook in recent months, and the fact that wages remain so subdued, it’s difficult to see how inflation can be sustained at above target rates once the temporary factors have faded away. So we expect to see inflation fall away pretty quickly, particularly once the VAT rise falls out of the calculation at the beginning of next year.

These figures certainly won’t prevent the MPC providing further stimulus, should they deem it necessary. The weak growth outlook is once again suggesting that an undershoot is at least as likely as an overshoot at the two-year horizon, so the MPC has plenty of flexibility to manage the economy through any slowdown.

Teodor Todorov, economist at the Centre for Economics and Business Research

The latest economic data falls in line with the expectations of the Bank of England Monetary Policy Committee (MPC), who stated in the their August minutes that they expected CPI inflation to rise to 5% in the near-term, before temporary factors vanish and downward pressures on prices begin to bring down the headline rate towards the 2% target.

While inflation is still on the rise, the Bank of England will also consider the wider economic outlook when a decision is made whether or not to resume the quantitative easing programme this autumn. The contraction in the manufacturing sector, the slowdown in the services sector, and the collapse of new export orders in some sectors suggest growth in the short-term will be very weak. Since monetary policy decisions take about one year to fully affect output in the real economy, the Bank is right to stress the longer-term prospects for the economy.

With unemployment increasing in manufacturing and services, and the fiscal measures starting to bite, the UK consumer will face a tough time over the next few months as inflation will continue to squeeze incomes. However, despite rising CPI inflation, the Bank will have to take strong action to stimulate the economy if any more downside risks materialise. If the Bank doesn’t, the chancellor will have to think about how fiscal policy can play a role.

James Knightly of ING Financial Markets

Utility bill hikes contributed less than we expected, which suggests more upside pressure coming from this component in September. Clothing and furniture prices accelerated more than expected though, with the annual rate of inflation for these components rising at their fastest rates since the series began in 1997.

Given the lagged effects of increases in food commodity prices and the ongoing pass through of utility bill increases we still look for inflation to break above 5% in the next couple of months. However, we expect CPI to drop sharply next year … [perhaps] as low as 1% late next year.

Given we forecast GDP growth of just 0.9% this year and 1.3% next year, a sub-target outlook for inflation implies a growing chance of further quantitative easing, most probably in early 2012 in our view.

Howard Archer, chief UK economist at IHS Global Insight

While the rise back up in consumer price inflation to 4.5% in August (its equal highest level with April and May since October 2008) is hardly pleasant news, it is fully in line with expectations and does not materially change the monetary policy outlook. It is evident that any interest rate hike is off the Bank of England’s agenda for a considerable time to come given the current softness of the economy and weakened growth prospects. Indeed, we do not expect the Bank of England to raise interest rates until 2013.

It is clear that if the central bank does act anytime soon, it will be to try to stimulate economic activity through more quantitative easing. This is looking ever more likely to occur as the flow of weak economic data and surveys continue.

Inflation should dip markedly at the start of 2012 as the impact of the January 2011 VAT hike from 17.5% to 20% drops out. We forecast consumer price inflation to be down to the Bank of England’s target level of 2.0% by the end of 2012, and it could very well dip below this level in 2013. Much will obviously depend on oil price developments.

Jeremy Cook, chief economist at foreign exchange company World First

It seems that higher utility bills and clothing costs have been mitigated by falls in food prices.

To be honest, this reading does not help the Bank of England one bit.

When it comes to the key question of whether to pursue another round of quantitative easing, this figure just perpetuates the uncertainty around their decision.

Some MPC members will be looking at this figure and it will reinforce their beliefs that inflation is too high for further asset purchases. While some will disregard this figure in the hope that prices moderate.

One thing we can be sure of is that the consumer will remain ‘under the cosh’, as wages are not increasing at anywhere near this rate. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds