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Whilst inflation is set to fall economic recovery remains “weak”.
The outgoing governor of the Bank of England, Sir Mervyn King, has argued that the UK will reach its target of 2% inflation within two years, an improvement on the predicted 2.4% inflation level predicted in February.
Announcing the Bank’s latest inflation report Sir Mervyn said “Today’s projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago”, which was “the first time I’ve been able to say that since before the financial crisis”.
In a statement the Bank tempered the positive inflation revisions by arguing that the United Kingdom’s economic recovery “remains weak and uneven”. According to internal research domestic demand increased moderately during 2012, but this was largely offset by a pronounced fall in exports. Employment continued to grow strongly. The weakness of productivity suggests that the financial crisis may still be weighing on the current effective supply capacity of the economy as well as on demand.
The Bank’s Monetary Policy Committee judges that the growth of both demand and effective supply are likely to pick up gradually over the next year or so, supported by past asset purchases, an easing in credit conditions aided by the Funding for Lending Scheme, and a continuing improvement in the global environment. But the legacy of adjustment and repair left by the financial crisis means that the recovery is likely to remain weak by historical standards.
CPI inflation remains above the 2% target and is set to edge higher over coming months. Inflation is likely to stay above the target for much of the next two years, bolstered by external price pressures and administered and regulated prices. But inflation is expected to fall back to around 2% in the latter part of the forecast period, as external price pressures fade and a gradual revival in productivity growth curbs increases in domestic costs.
