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CPI inflation may peak around 4%

Bigger rises in commodity and component costs than we had expected mean that we now think CPI inflation will rise from 2.1% in May to a peak of about 4.0% around the turn of the year. But we still think this will be a short, sharp spike in inflation that won’t feed into persistently faster pay growth or higher inflation expectations for a couple of years yet. As such, we suspect the Monetary Policy Committee will look through it and won’t tighten policy as soon mid-2022 as the financial markets expect.

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