UK | Inflation risks rise, but counter forces should prevail
Technical factors will push inflation up in the short-term and the fallout from the pandemic will raise inflation risks further out. But on balance we think a mix of the stronger pound, a persistent output gap, and more fundamental forces point against the UK entering a new era of sustained higher inflation.
Comparisons with a depressed 2020 and the end of the temporary VAT cut for hospitality will mechanically raise inflation this year. And were consumers to spend a bigger-than-expected share of savings, combined with the recent surge in money growth, that rise could continue for longer than we expect.
The pandemic’s repercussions could result in persistent upward pressure on prices. But the stability of inflation over the last 30 years and the effect of this on expectations is a major counter. Equally, the institutions and labour and product markets which facilitated high inflation in the past are lacking.
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