Inflation Report
Global economic and financial market developments
The broad‑based momentum in global growth has continued, and the outlook for the euro area in particular has strengthened. As growth has recovered, spare capacity in many countries is being absorbed. That strength has supported the prices of risky assets. Sterling remains significantly below its level prior to the EU referendum.
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Demand
Consumption growth has slowed gradually since mid-2016, as sterling’s depreciation has squeezed household real income growth. Consumption growth is projected to remain subdued in the near term before picking up gradually as that squeeze abates. Offsetting some of the weakness in consumption, business investment growth and net trade have risen, probably reflecting the depreciation and strong global demand. They should continue to support modest overall growth in the near term.
Output and supply
Output growth has been modest in recent quarters. In contrast, growth in employment has remained fairly robust and the unemployment rate has fallen by more than expected. Accordingly, productivity growth has been weak and is expected to remain subdued. The modest outlook for growth in supply capacity will limit the pace at which output can grow without generating inflationary pressure.
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Costs and prices
CPI inflation rose to 3.0% in September. It is expected to peak at 3.2% in October, as increases in imported costs — stemming from the past fall in sterling and a more recent pickup in global energy prices — are passed on to consumer prices. Inflation is then expected to fall back as past rises in energy prices drop out of the annual comparison and as the pass-through of rises in other import prices progresses. Alongside that moderation in external pressures, however, domestic inflationary pressures are likely to build to more normal levels.
Prospects for inflation
CPI inflation has risen further above the 2% target as companies pass on the higher costs stemming from the lower level of sterling. Unemployment has continued to fall and the extent of spare capacity in the economy now seems limited. Moreover, the pace at which the economy can grow without generating inflationary pressure has fallen over recent years. Over the MPC’s forecast period, conditioned on a path for Bank Rate that rises to 1% by the end of 2020, demand is projected to grow at a pace that uses up the remaining slack in the economy. As imported inflationary pressures wane, domestic pressures build. Inflation is projected to remain slightly above the 2% target at the three-year point. At its meeting ending on 1 November 2017, the MPC voted to increase Bank Rate to 0.5%.
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