UK inflation: lower near-term peak but no return to target

12th July 2011 by Simon Ward

A post in May suggested that CPI inflation would undershoot the Bank of England’s forecast over the next 12 months while remaining well above the 2% target over the medium term. The fall from 4.5% in May to 4.2% in June supports this prediction, although part of the favourable surprise reflects an earlier-than-usual start to summer sales and should be reversed next month.

The earlier post suggested that inflation would peak at 4.6% this autumn and fall below 3% in early 2012. In its May Inflation Report, by contrast, the Bank forecast a quarterly-average peak of 5.0% and a slower decline, with a two handle regained only in mid 2012.

Despite today’s better news, the inflation peak is likely to be slightly higher than indicated in the previous post because the outlook for household energy prices has deteriorated, following the announcement by market leader British Gas of gas and electricity rises of 18% and 16% respectively. The chart shows an updated profile taking into account the June figures and higher energy prices but otherwise based on the same assumptions as previously. The new suggested high is 4.8% in September / October.

Previously-targeted RPIX inflation may already have peaked at 5.5% in February, as mooted in another recent post. It fell to 5.0% in June and may rise by less than CPI inflation because of soft house prices and a slower rise in insurance premiums (which have a larger weight in the RPI than CPI).

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