UK annual inflation rates fell sharply in January as the bulk of the impact of last year’s VAT hike washed out of the figures. Core price trends, however, remain sticky, casting strong doubt on forecasts that CPI inflation will return to the 2% target or below this year.

The chart shows six-month annualised changes in smoothed core CPI and RPI measures. The former strips out energy and fresh food and attempts to adjust for VAT changes and seasonal factors while the RPI measure additionally excludes mortgage interest costs and housing depreciation. CPI core momentum has been persistently above 2% in recent years, standing at 2.7% in January, with the RPI measure higher at 3.5%.

The central scenario here, based on stable core momentum and a modest firming of commodity prices during 2012, is that CPI inflation will bottom at about 2.5% in the autumn and edge higher into year-end, implying a seventh consecutive December overshoot. RPI inflation is expected to follow a similar profile, with an autumn trough of about 3.25%.

Looking further ahead, inflation may rise in 2013, reflecting global pressures and the lagged impact of QE2. A pick-up in global inflation is suggested by a revival in monetary growth in 2010-11, based on the Friedmanite rule that money leads prices by about two years. Meanwhile, “monetarist” estimates of the impact of QE1 in a recent Bank working paper imply that planned total QE2 buying of £125 billion by May 2012 could add about 0.6 percentage points to inflation by mid 2014, with the bulk of the effect occurring during 2013.