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Increased risk of “second-round” effects

We’ve been warning for some time that CPI inflation would rise further than most people expect, triggering a recession. The prospect of even bigger rises in utility prices on 1st October and in the first half of 2023 than we have pencilled in suggests that the risks to our forecast for CPI inflation to rise from June’s 40-year high of 9.4% to 12.5% in October are now skewed to the upside. That increases the risk of bigger, longer-lasting second-round inflation effects. Admittedly, there have been some encouraging signs that price pressures towards the start of the inflation pipeline have passed their peak. But it is worrying that domestic inflationary pressures, such as those in the services sector, are still rising, as they tend to last longer. As a result, we still think that the Bank of England will raise interest rates from 1.75% to 3.00% even when the economy is in recession.

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