Inflation will spike in 2021, but then fade

We expect CPI inflation in the UK will accelerate sharply during 2021, breaching the BoE’s 2% target by autumn. But the pickup will be largely due to base effects from the abnormally low inflation last year, and we think long-running disinflationary forces will reassert themselves next year.

The inflation spike will be concentrated in the fuel and energy components. Ignoring VAT-related volatility, we expect core inflation to remain subdued, particularly given the prospect of sterling strengthening.

The MPC has been clear that a strong recovery is the key to lifting inflation up to 2% on a sustained basis. Any hawkish shift would be based on evidence the recovery is out-performing expectations, not on a transitory rise in inflation.

Topics: Coronavirus