Inflation: what the experts say

Economists are concerned that UK inflation is stuck stubbornly above the government's target, after the consumer prices index remained at 3.1% in August . But despite the rising cost of living, the Bank of England is not expected to raise interest rates for another year. Scott Corfe, economist at the Centre for Economics and Business Research Inflation continues to show no sign of returning to the Bank of England's 2% central target. On a month-on-month basis, the CPI increased by 0.5% in August compared to July. The annual rate of consumer price inflation excluding indirect taxes such as VAT also remained unchanged at 1.4%. This is bad news for consumers given that earnings growth looks set to remain modest and below the rate of inflation over the short-to-medium term, squeezing household spending power. Despite this, it seems unlikely that the Bank of England will tighten monetary policy in the short-run, given the fragile nature of the economic recovery and the impending public sector spending cuts. It now seems likely that inflation will remain above target for an extended period of time as a number of price-increasing factors have entered the pipeline. The Russian grain export ban looks set to last for at least a year, which will keep international food prices structurally higher. Meanwhile, cotton prices have hit a 15 year high as floods in China and Pakistan have reduced global supply. This could lead to higher clothing prices over the coming months, and retailers such as Primark and Next have warned that their profit margins could be squeezed as a result of these rising input prices. The VAT rise to 20% in January 2011 will make a significant contribution to inflation next year. Andrew Goodwin, senior economic advisor to the Ernst & Young Item Club On the face of it these figures are worryingly high and will provide further ammunition to the inflation hawks out there. We had expected CPI inflation to drop back below 3% in August, but inflation has remained above the upper limit for an eighth successive month. What is also surprising is that the biggest cause of this overshoot wasn't wheat prices, but air fares and clothing. These elements can be pretty volatile from month-to-month, which gives us some hope that they will unwind next month. However, retailers are saying that inflation in clothing prices will remain high over the next few months and there is also potential for further increases in food prices since the impact of wheat crisis has not yet fully fed through to shop prices. Today's figures will add to the tensions amongst some MPC members about the current level of inflation and the potential for it to become entrenched in people's expectations. We remain sceptical about the idea of a wage-price spiral because we see little scope for workers to force through wage rises against a backdrop of high unemployment and public sector job losses. We remain of the opinion that inflation will fall back from 2012, once a series of temporary factors have fallen out of the calculation. Indeed, the fact that CPIY - the measure that excludes indirect taxes - remains at just 1.4% suggests that underlying pressures remain well controlled. However, if the headline rate remains at these levels then the committee will find that the policy debate becomes excruciatingly tense in the months ahead. Christina Weisz, director at foreign exchange specialists Currency Solutions It will be a concern to the government that after three months of falling inflation, August saw inflation levels remain unchanged at 3.1%, particularly with its spending cuts just around the corner. It will also be a concern that inflation remain stubbornly above 3%, particularly with a tightening of fiscal policy imminent and the impending rise in VAT, which are likely to apply upward pressure on an inflation level still well above the 2% target. Sterling took a tumble this morning off the back of expectation from a section of the market that inflation would fall below 3%. With inflation remaining above 3%, the pound has regained those losses and is currently trading around last night's closing levels. Howard Archer, chief UK and European economist at IHS Global Insight While the Bank of England is likely to be mildly disappointed with the August inflation data, the figures are unlikely to significantly change the bank's view that underlying inflationary pressures will gradually wane over the coming months, and consumer price inflation is still likely to fall below its 2.0% target rate in 2012. As such, it still seems probable that the monetary policy committee will hold off from raising interest rates for some considerable time to come. Specifically, we forecast the first rise in interest rates to come in the fourth quarter of 2011 and see interest rates still only at 1.00% at the end of next year. In fact, we would not rule out interest rates staying down at 0.50% until 2012. Indeed, if the Bank of England does act at all in the near term, we believe it will most likely be to revive Quantitative Easing in the face of faltering economic activity and persistently tight credit conditions. Furthermore, whenever interest rates do finally start to rise, they are likely to remain very low compared to past norms, as monetary policy will need to remain loose for an extended period to offset the impact of the major, sustained fiscal squeeze. James Knightley, UK economist at ING There are some concerns about food price inflation and the hike in the VAT rate at the beginning of next year, but the strengthening seen in sterling should at least help to dampen import price inflation in coming months. Meanwhile, a weak economic recovery and the headwinds of major fiscal austerity measures should dampen corporate pricing power and limit the likelihood of second-round price effects in the medium to longer term. Moreover, with the Bank of England targeting inflation on a two-year horizon -- it is currently focusing on September 2012 -- the VAT hike will have been and gone. Indeed, as it drops out of the annual comparison we are likely to see headline inflation push sharply below 2% for most of 2012. Add in concerns about the outlook for growth and we doubt that any other members of the Monetary Policy Committee will be won over by the BoE's lone hawk, Andrew Sentance's view that they should be starting to normalise monetary policy. Our view remains that the BoE will not seriously consider tightening monetary policy before 4Q11." Philip Shaw, economist at Investec Overall inflation is stubbornly high and the impact of higher wheat prices has yet to exert itself fully on CPI figures. The likelihood is that inflation will still fall but it's likely to fall more slowly over the next year or so and the Governor would be well advise to keep his pen out on his desk given that he'll have to write more letters to the Chancellor.