By Daniel Hunter
Tuesday's inflation figures confirm the importance of the VAT rise in keeping inflation high in 2011.
According to Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, this is likely to be the last letter from the Governor to the Chancellor for a while, and inflation is expected to be back below target by early autumn.
“We’ve been waiting for these figures in the anticipation that they would help to emphasise the importance of the temporary factors that kept inflation high through last year. In the event they didn’t disappoint, with sharp drops across all main measures of inflation," Goodwin said.
“Obviously we’re still some way above the 2% target, which means that the Governor has had to pen another letter to the Chancellor. But given that those letters are only written every three months, this is likely to be the last one for a while. The next few months should see inflation continue to slow, as last year’s sharp rises in petrol prices fall out of the year-on-year calculation, and we should be back below the 2% target by early autumn.
“These figures provide the MPC with plenty of leeway to run very loose monetary policy and it would be a surprise if tomorrow’s Inflation Report didn’t show inflation remaining below target for much of the two-year forecast horizon. Looking back, it’s clear that the MPC was overly cautious in the first half of last year, when concerns about a wage-price spiral led some members to vote for rate rises, rather than the additional stimulus that came belatedly in the autumn.
“The prospect of much lower inflation is good news for households who have seen their spending power progressively squeezed over the past four years. The benefits won’t be felt immediately, but by the end of this year we expect wages to be growing in real terms once again, which should enable UK consumers to begin to play their part in the recovery.”
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