The influential Ernst & Young ITEM Club has called on the Bank of England to raise its official inflation target.
In order to avoid jeopardising the fragile economic recovery, the ITEM Club believes the Bank needs to increase the inflation target by 50 basis points from 2% to 2.5%.
At the same time, they have cautioned the Bank against using interest rate policy to control price inflation in the current environment.
In the same report, the ITEM Club warns that the UK economy could slip back into recession later this year, as a result of weaknesses in the services sector.
The recommendation to increase the inflation target is sensible.
Whilst we expect price inflation to become lower at the start of next year, once the VAT increase falls out of the calculation, inflationary pressures clearly remain a concern for the strength of the economic recovery.
One good suggestion is to link the Bank of England inflation target to the more stable ‘core’ inflation figure, which excludes some of the items with more volatile pricing.
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