Inflation on the launchpad

We’ve been warning for a while that CPI inflation would rise further than most people expect and have recently pushed our own forecast even higher. We now think CPI inflation will rise from 3.1% in September to 4.0% in October and to almost 5.0% in April 2022. The RPI measure of inflation may reach 7%. This surge will mainly be driven by some big leaps in utility prices and the influence of previous rises in global costs. But while the prospect of inflation staying higher for longer may prompt the Bank of England to raise interest rates from 0.10% in December, higher inflation would also reduce the real spending power of households and firms. We still expect inflation to come back down to earth by the end of next year, which underpins our view that the Bank won’t raise interest rates far next year. Indeed, our forecast that rates will reach 0.50% by end-2022 is well below the 1.00% priced into money markets.