Medium-term price pressures on the rise

The key development of the last month was the rise in CPI inflation to 3.1%, which triggered an explanatory letter from the Governor of the Bank of England to the Chancellor and pushed the pound through $2. More evidence that firms are widening their margins and the continued strength of the monetary aggregates have further boosted fears over the medium-term inflation outlook. We now think that interest rates will rise to 5.75%. This is line with the markets’ expectations, but leaves us more hawkish than most other forecasters.