Katy Balls

Bank of England: inflation blip is ‘entirely’ temporary

Bank of England: inflation blip is ‘entirely’ temporary
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Although Mark Carney has earned a reputation for doom-mongering over Brexit, today's Bank of England press conference wasn't all doom and gloom. While the bank voted – at six votes to two – to keep interest rates at 0.25pc (see the leader in this week's issue of The Spectator for why this isn't such a great idea), its Inflation Report did bear better-than-expected news.

On inflation, Carney said it was expected to peak at 3pc in October from its current rate of 2.6pc. However, this rise is ‘entirely’ temporary, and the Bank of England’s Monetary Policy Committee (which aims to keep inflation at 2pc) expects real wage growth to return soon as earnings growth accelerates from 2pc to 3pc with inflation moving below that:

‘This overshoot reflects entirely the effects of the referendum-related falls in sterling. As the effect of rising import prices on inflation diminishes, domestic inflationary pressures gradually pick up over the forecast period.

As slack is absorbed, wage growth is projected to recover. In addition, margins in the consumer sector, having been squeezed by the pickup in import prices, are projected to be rebuilt. Consequently, inflation remains at a level slightly above the 2pc target.’

The findings are in stark contrast to a rather pessimistic forecast from NIESR. Back in November, the think-tank predicted inflation would hit ‘around 4 per cent in late 2017’. The forecast was widely reported in the media amid warnings it would see disposable income slashed. That prediction now looks overblown.

Still, it's not the first time NIESR have missed the mark with a forecast. After the referendum the think-tank said the economy would shrink by 0.2 per cent and there was an ‘evens’ chance of a recession. Instead, it grew by 0.5pc and there's no sign of a recession yet. And yesterday it said the economy will grow by 1.7pc in 2017, up from a forecast of just 1pc made after the referendum.