Inflation could edge up to 4% by spring
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The Ernst & Young Item Club has predicted that inflation could near 4% by Spring, but it says it’s vital that the Bank of England continues to hold its nerve on interest rates.
It says that inflation is currently being boosted by indirect taxes, commodity prices and the UK and world economies adjusting.
But it says that with earnings rising by less than the rate of inflation it says household budgets are under strain and any decision to up interest rates would be a “perverse” move on the part of the Monetary Policy Committee.
In its Economic outlook, it says: “The MPC should hold its nerve and keep base rates where they are until it is clear that the economy is taking the fiscal adjustment in its stride.”
Exports and investment should be sufficiently strong to sustain the recovery this year although it says the outlook remains cloudy, particularly in terms of monetary policy.
But it adds: “If the MPC holds its nerve and inflation comes back into line with the target next spring, prospects for 2013 and beyond will look much less gloomy.”
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