CPI is slowly making a comeback, but it’s still way below the Bank of England’s 2% target. Inflation isn’t just a measure of prices in the here and now, but also one year ago. More substantial gains can therefore be expected as we head into spring, as the baseline for comparison moves into the post-pandemic era.
The current lockdown may create some short-term volatility in the number, but the overall picture is one of low, gradually rising inflation. The economic damage of the pandemic means that many businesses won’t want to deter valuable customers by raising prices for some time to come.
There is a legitimate question of whether all the fiscal and monetary stimulus thrown at the pandemic will create inflationary pressures further down the line. When confidence returns, we could see businesses looking to recoup losses by pushing through price rises. While the pandemic has cost some their livelihoods, we know that many people have actually seen a boost to their finances from enforced frugality, allowing them to afford price increases in future.
For the foreseeable future though, inflation looks well contained, putting little pressure on the Bank of England to raise rates any time soon. Indeed monetary policy may yet loosen before it tightens again, though the curative economic potential of vaccines may persuade the central bank to stay the course until the science hopefully comes to the rescue.
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