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Budget 2011: Economists tell MPs we may have deflation next year

Economists are forecasting that inflation will be pushed down sharply next year to move below the Bank of England’s 2 per cent target, and say it is possible we will see deflation next year.

The Office of Budget Responsibility has forecast that inflation will peak this year before starting to come down next year and returning to the 2 per cent target by 2013.

In a Treasury select committee evidence session on the Budget today TSC member and Liberal Democrat MP for Caithness, Sutherland and Easter Ross John Thurso asked whether the OBR’s assumptions were credible.

Capital Economics managing director Roger Bootle (pictured) said: “My own view it is the standard thing to do to assume that inflation will go back to target. The forces are in place to bring inflation sharply down next year. I doubt it will stop at the target and we will actually end up with inflation much lower than 2 per cent and not only that but inflation will be driven into negative territory.”

The National Institute of Economic and Social Research also gave evidence to the committee.

NIESR director of macroeconomic research and forecasting Ray Barrell said the prospects for inflation were uncertain, with a 90 per cent chance that in 2012 inflation will be somewhere between 0 and 4 per cent.

Barrell said: “All sorts of things can sound plausible within that range, and there is even a 10 to 15 per cent chance that we will see deflation in 2012.”

He added that the factors currently pushing up inflation, such as the VAT increase from 17.5 per cent to 20 per cent and high oil prices, would largely disappear by next year.

The forecasts come in the same week as figures put out by the Office for National Statistics which show that the Consumer Prices Index measure of inflation rose from 4 per cent to 4.4 per cent in February, the highest level since 2008.

Retail Prices Index inflation is up from 5.1 per cent to 5.5 per cent.

Monetary Policy Committee member Andrew Sentance warned on Tuesday that inflation could rise above 5 per cent this year.

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  1. What a load of tosh – so inflation could be anywhere 0% -4% or even deflation!

    No it won’t it will be inflation still in 2012 as QE 2 monies are still pouring into the system. It has taken 18 months for QE1 money to start to push up inflation in the world and it has some way to go. It is in China now and so we will import inflation for the next few years rather than as we have been doing until last couple of years importing deflation.

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