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Higher oil prices not a major threat to the inflation outlook

As a result of the rise in oil prices in recent weeks, CPI inflation will certainly be a bit higher than we had previously anticipated in the near term. This suggests that it won’t be long before the Governor of the Bank of England gets his letter writing pen out to explain to the Chancellor why CPI inflation is more than one percentage point above the 2% inflation target. Nonetheless, the effect of higher oil prices on inflation should disappear next year. And there is little evidence of the sort of “second-round” effects on inflation expectations that could lead to a period of persistently high inflation – exacerbating the real pay squeeze and raising concerns about the ability of consumers to withstand higher interest rates. Overall, then, we don’t think that higher oil prices should have much bearing on the MPC’s monetary policy stance.

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