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2 November 2016

This time next year, inflation may be at 4 per cent

A debate about monetary policy is unlikely to be resolved soon. 

By Julia Rampen

You may not notice prices increasing now, but in a year’s time it will be making a more obvious dent in our pockets, an inflation forecast suggests.

The National Institute of Economic and Social Research expects consumer inflation to accelerate over the coming year, to reach a peak of 4 per cent in the second half of 2017. Inflation is already at a two-year high, but it was still at just 1 per cent in September.

Meanwhile, economic growth will slow to 1.4 per cent in 2017, compared to 2 per cent in 2016.

The slump in the value of sterling is expected to drive inflation, as the cost of imported goods will rise. The pound plummeted after the Brexit vote to a 31-year low against the dollar and a 5-year low against the euro, and the NIESR does not expect it to rise any time soon. 

If the forecast is correct, it means the focus on the Bank of England is unlikely to end. Mark Carney, the governor, has fended off demands from Brexiteers to resign for “talking down the economy”. But his pledge to stay on until June 2019 is unlikely to quell the dissent. 

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Carney has suggested that the Bank will keep interest rates low, even if this means the inflation target of 2 per cent is missed. 

As NIESR noted, this means a “trade-off for monetary policy”. The Bank risks enraging both the poorest in society, who are hurt most badly by rising food prices, and wealthy savers and retirees, as low interests mean less returns on savings.

The benefits of low interest rates – cheap mortgages and credit for businesses – have been recognised for years. The Chancellor is expected to relax fiscal rules to allow for a further stimulus through investment in infrastructure. 

Monetary policy and macroeconomic fiscal targets are usually dry subjects. But at a time when the nation’s economic health is directly linked to a political decision, Brexit, there may be plenty more spats to come.