Although the slide in the trade-weighted sterling index of a little below 10% since the referendum result will give exporters a much-needed boost to their competitiveness, it will also lift the prices of imported materials and finished goods, leaving the MPC with an awkward trade-off between minimising a short-term hit to the economy and overshooting its inflation target.
It seems reasonable to think that almost all of the recent movements in sterling will be reflected in import prices fairly quickly and that 30% or so of this rise may be passed through to the CPI – although this upward pressure could be mitigated to some extent by the weaker economic environment. Accordingly, we now expect inflation to rise from 0.6% this year to 2.2% in 2017 and 2.8% in 2018 (compared with 1.5% and 2.1% in 2017 and 2018 in our forecasts made prior to the referendum).
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to gain:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services