David Prosser: The inflation outlook has not changed

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The Independent Online

Outlook Another month, another inflation figure at the top end of economists' expectations. Cue another burst of anxiety that interest rate rises are imminent. But there are at least two good reasons to doubt the theory that the mounting pressure on inflation will leave the Bank of England's Monetary Policy Committee unmoved.

The first is the argument that there is not much chance of even a sharp rise in interest rates – say two or three 0.25 percentage point increases – having much effect on inflation. The most significant factor in the inflation story has been the global commodities boom, which has seen fuel and food prices soar. Raising interest rates won't address that problem, any more than it will mitigate the effect of January's hefty VAT rise, which will start showing up in the next set of data.

Second, the MPC's members long ago proved they would not be as flimsy as straws in the wind. They are no more likely to bend to demands for a rate rise than they were to give in when, just a few short months ago, the consensus view was that another bout of quantitative easing was called for.

In fact, the Bank of England has consistently argued that short-term inflationary pressures will, in the end, subside, even if it has had to keep putting back its assessment of when the medium term might arrive.

We'll see if that view provescorrect soon enough. In the meantime, it's worth noting that inflation running at double the targeted rate is merrily reducing the value of UK debt, in real terms, much more quickly than expected. This is why, by the way, some people still think the inflation target ought to be moved to 4 per cent. In which case, the MPC might finally hit it.

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