Refresh this chart in your browser | Edit the chart in Datastream
Evidence is starting to build to support the case that the net result of the post-pandemic recovery will be inflation. As Fathom has discussed in recent research, the upward pressure on inflation will come in more forms than base effects, with pressures in the form of a build-up in household savings and the monetary overhang pushing up inflation too. But absent additional pressures, how big will those base effects be?
As a measurable example, the UK government temporarily cut VAT from 20% to 5% for certain items of hospitality and catering, as part of the COVID-19 support package. These supportive rates have subtracted 150 basis points from headline inflation in the UK over much of 2020; CPI would have reached the Bank of England’s 2% target had they not been in place.
Once those tax cuts drop out of the twelve-month percentage change calculation, headline inflation will rise sharply. And will rise further still once they are reversed, which is set to happen in September 2021. If you add cyclical pressures to that, inflation is likely to move materially above target. The central path in Fathom’s forecast reaches 3.1% in 2022, with a greater than 50% risk of CPI still being over 3% by 2022 Q3.
Join a growing community of asset managers and stay up to date with the latest research from Refinitiv and partners to help you inform your investment decisions. Follow our Asset Management LinkedIn showcase page.
________________________________________________________________________________________
Refinitiv Datastream
Financial time series database which allows you to identify and examine trends, generate and test ideas and develop view points on the market.
Refinitiv offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.
