Chart of the Week: Bank predicts higher inflation, but is their forecast high enough?

The Bank of England’s August Monetary Policy Report included an update of their macroeconomic projections out to 2024. The Bank now expects UK inflation to peak at 4% towards the end of this year and start of 2022, before drifting back towards target by the end of the forecast horizon. While many, including Fathom, agree with the Monetary Policy Committee’s assessment of the near-term outlook, there is less consensus beyond the end of this year. Key in the medium term will be how quickly excess pandemic-induced savings are spent and the extent to which higher short-run prices get embedded into the expectations of wage and price setters in the medium run. Fathom sees these outcomes as more likely than the MPC expects and, consequently, expects higher inflation to persist well into next year.

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