Why we shouldn’t be too frightened by inflation

Inflation will come down by the end of the year, writes Hamish McRae, but we should be aware that the long period of very low inflation is coming to an end

Wednesday 12 January 2022 08:46
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<p>In practical terms, if the decline in inflation is not as swift as predicted, the central banks will have to act, pushing up interest rates and ending quantitative easing</p>

In practical terms, if the decline in inflation is not as swift as predicted, the central banks will have to act, pushing up interest rates and ending quantitative easing

The bad news on inflation is that it is going higher. The good news is that by the summer it will have started to go down again. We hear a lot about the former for obvious reasons. We hear a lot less about the latter. So what is going on?

The consultancy Oxford Economics has just put out some forecasts for the profile of consumer price inflation this year. For the UK it peaks at just below 6 per cent in late spring, before falling back to between 2 per cent and 3 per cent by the end of the year. For the US the peak is higher, a bit above its present level of 6.8 per cent, but its decline thereafter brings it down to much the same level as the UK. (The US may reach 7 per cent in the CPI figures out on Wednesday.) For the Eurozone the numbers are lower: a peak below 5 per cent and then a decline to around 1 per cent by the end of the year.

The reasons for the decline are partly because the surge in energy costs, the principal driver of inflation, will subside. The rise is quite extraordinary, particularly of natural gas. It has gone up fourfold since early 2020. It may not come back to the level then, but the fact that it is falling from its present very high base will automatically mean that its impact on overall inflation will go into reverse. Falling energy prices will push down inflation overall.

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