The latest quarterly inflation report from the Bank of England makes for some interesting reading.
The main focus of this report is likely to be the warning that price inflation, as measured by the Consumer Prices Index (CPI), could be pushed as high as 5% later this year due to higher utility bills.
Within the report there are warnings of strong downward pressures on economic growth combined with continuing upward pressures on price inflation.
There is recognition within the report that the economic recovery remains weak.
Whilst global economic growth, monetary stimulus and the current level of sterling should support economic growth in the UK, the squeeze on real household income will place pressure on demand.
The report warns that, in addition to price inflation increasing further this year, it is likely to remain above the government target of 2% throughout next year as well.
The Bank forecasts that price inflation will start to fall in 2012 and into 2013, as the pressure from external price rises and the VAT increase in January 2011 fall out of the calculation. The timing and extent of the fall in inflation both remain highly uncertain.
All of this means that the medium term forecast for inflation remains about the same for above or below target inflation.
A forecast like this is likely to mean interest rates remain on hold at their historically low rates for longer.
Whilst the prediction of even higher price inflation is uncomfortable, particularly for those savers who are seeing the real value of their wealth being eroded, it is the weaknesses in the economy which will keep interest rates low and monetary stimulus in place.
