The Bank of England reported today that consumer prices rose 3.5% in Q2. Consumer inflation was 3.2% in June and 3.7% in April. The current level of inflation is well above the bank’s 2% target level, and they warned that it could remain so for longer than they had previously expected.
Yet they expressed hope that inflation would drop well below the bank’s 2% target level… within two years time.
Bank of England:
CPI inflation was 3.5% in 2010 Q2, well above the 2% target. Inflation is likely to fall in the near term, as upward pressure from past increases in oil and import prices wanes. But inflation is likely to remain above the target for longer than was anticipated at the time of the May Report, in large part because of the forthcoming increase in the standard rate of VAT to 20%. Earnings growth remains weak. Although a number of measures of households’ short-term inflation expectations have risen, inflation expectations remain at levels that appear broadly consistent with inflation being around the target in the medium term.
Inflation is likely to remain above the 2% target for longer than projected in May (Chart 5.7), reflecting slightly higher-than-expected outturns for inflation, the likelihood of a rise in domestic gas prices (see the box on page 42), and, most substantially, the forthcoming increase in VAT, which is likely to add more than 1 percentage point to CPI inflation throughout most of 2011. The Committee has increased the width of the fan chart in the near term, given the large movements in relative prices such as energy and other commodity prices in recent years, and the resulting increase in the volatility of inflation over that period. Further ahead, CPI inflation is likely to fall below the target, as persistent spare capacity weighs on companies’ costs and prices.
Find the full report below.
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