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Short and long term forecast
Inflation is more likely than not to remain above 2% for much of the next two years. This further sustained period of above-target inflation largely reflects the impact of the depreciation of sterling earlier this year and the judgment that the unusually large contribution from administered and regulated prices will persist.
Despite that, inflation is likely to fall back to around the 2% target by 2015. A gradual revival in productivity growth, combined with persistent spare capacity, should dampen domestic cost pressures sufficiently to offset the sustained elevated contribution from administered and regulated prices.
There are a number of other sources of uncertainty affecting the outlook for inflation. As ever, inflation may be buffeted by movements in the exchange rate and commodity prices, both of which are prone to move sharply. It is unclear for how long inflation can remain above the target before it affects public perceptions of the MPC’s determination to keep inflation close to the 2% target, with potential implications for wages and prices. The path of inflation will also depend upon the extent to which companies’ profit margins are restored through higher prices, rather than through slower cost growth.
In summary, inflation is more likely to be above than below the 2% target for much of the next two years, to around 2.5% – 3%. If you therefore hold cash deposit at this time, interest rates remain very poor but there are some 2-3 year deals around offering 3% and we will feature in ssas autumn newsletter a table of the latest rates.