UK inflation at risk of extended overshoot
Simon Ward
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The chart below shows an updated profile for annual consumer price inflation over the next 12 months based on the following assumptions:
- Household electricity and gas tariffs are raised by a further 10% over the summer in response to recent steep rises in wholesale energy costs. This would imply a full-year increase of 25%.
- Unprocessed food price inflation is stable at its current annual rate of 2.4%.
- “Core” consumer prices – i.e. excluding unprocessed food and energy – rise at a 2.25% annual pace for the remainder of 2008, falling to 2.0% during 2009. This is modestly higher than over the last 12 months, reflecting assumed pass-through of large import and raw material cost increases.
On these assumptions, which do not appear unduly aggressive, headline CPI inflation is projected to be above 3% in every month between July 2008 and January 2009, peaking at 3.5% in September.
If correct, such a profile would raise a large question mark over consensus hopes that the MPC will lower Bank rate steadily over the remainder of 2008.
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