Thursday, July 3, 2008

Inflation Report

In the United Kingdom, output growth moderated and surveys point to further easing. Indicators of household spending were mixed, while the investment climate worsened. International prospects deteriorated, especially in the United States. Stresses in global financial and credit markets intensified in March but latterly there have been signs of improvement. Sterling depreciated further and in April the MPC cut Bank Rate by 0.25 percentage points.

Under the assumption that Bank Rate moves in line with market yields, the Committee’s central projection is for output growth to slow further over the next year and then recover. But there is a risk that the slowdown may be more prolonged.

CPI inflation was 2.5% in March. Energy and import cost pressures increased. Pay growth remained muted but measures of household inflation expectations rose. In the central projection, higher energy and import prices push inflation up sharply in the near term. The emerging margin of spare capacity, together with a declining contribution from energy and import prices, then brings inflation back to around the 2% target in the medium term. The conflicting risks to inflation from a more prolonged slowdown in demand growth and from the impact of persistently elevated inflation on inflation expectations have both increased since the February Report. Overall, the balance of risks is presently judged to lie to the upside.

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