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UK inflation: consensus abandons hope of target reconnect

Posted on Monday, March 26, 2012 at 03:40PM by Registered CommenterSimon Ward | CommentsPost a Comment

Previous posts argued that UK CPI inflation would remain comfortably above the 2% target during 2012, reflecting stubborn “core” pressures and an expected rise in global industrial commodity prices. A central scenario envisaged the headline rate troughing at 2.5% in the autumn and moving higher into 2013.

The consensus, by contrast, had bought into the Bank of England’s assertion that inflation would reconnect with the target in late 2012 and move beneath it in early 2013. In the December 2011 edition of Consensus Forecasts, the average prediction for CPI inflation in the first quarter of 2013 was 1.9%.

The consensus, however, is shifting in response to rising global energy costs and recent disappointing outturns. The UK economics team of a major US investment bank last week revised up its projection for December 2012 CPI inflation to 2.9% from 2.0% at the end of last year. The energy price “shock” accounts for 0.4 percentage points of this forecast change with a raised assumption for core inflation contributing a further 0.25 percentage points.

The emerging new consensus implies that CPI inflation will be above the 2% target for the seventh consecutive December, in turn suggesting that the MPC was wrong to launch QE2 in October 2011, as argued in previous posts.

The inflation forecast here is essentially unchanged since recent developments do not represent “news” relative to its assumptions, while a slowdown in global economic growth from the spring is expected to relieve upward pressure on energy prices. The chart shows a profile for the headline rate and a core measure excluding unprocessed food and energy.

In a Guardian interview a year ago the MPC’s leading dove, Adam Posen, predicted that inflation would tumble to 1.5% by the middle of 2012 and stated that: “If I have made the wrong call, not only will I switch my vote, I would not pursue a second term.” Will Dr. Posen honour his pledge or try to shift the goalposts by appealing to economic weakness or claiming his forecast was blown off course by yet more “one-off” shocks?


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