CPI inflation was unchanged at an annual 2.7% in December, though was flattered by an erratic-looking slowdown in air fares – this subtracted 0.1 of a percentage point and should reverse next month.
The forecast here remains for CPI inflation to move up to 3.0% in early 2013 and fluctuate around this level for the remainder of the year – the first chart shows a possible profile. The goods component is likely to drive the pick-up, a suggestion supported by recent stronger industrial price-raising plans – second chart.
Producer price figures for home-grown food suggest a further rise in CPI fresh food inflation, although a 2008-style surge is not in prospect – third chart.
The forecast inflation profile is judged here to be conservative since it assumes limited upward pressure on global wholesale energy prices, which could be pushed higher by stronger economic growth and / or geopolitical events.
Gilt market RPI inflation expectations have shot up following the National Statistician’s decision last week to retain the existing calculation method for the index – fourth chart. Implied inflation in five years’ time is now 3.1%, the highest since June 2011, according to the Bank of England.
Future RPI inflation of 3% plus is unlikely to be compatible with on-target CPI inflation – the “formula effect” gap between CPI and RPI inflation is currently -0.85% and may narrow as the Office for National Statistics implements smaller methodological changes, such as improved collection of clothing prices. A similar level of market-implied inflation in early 2011 probably contributed to the MPC’s hawkish bias at the time: three members – Dale, Sentance and Weale – voted to raise Bank rate in the four months from February to May 2011.
