Inflation heading for 3%

October’s rise in CPI inflation from 1.1% to 1.5% marked the start of an upward trend which could see inflation rise to 3% or above early next year. (See Chart.) Energy base effects and the planned reversal of the VAT cut will be the main drivers of the rise. But we remain convinced that the vast amount of spare capacity in the economy will keep underlying price pressures subdued and still think that inflation will drop back to very low, or even negative, levels later next year and in 2011.