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Forecasters warn of threat from deflation

Economists are forecasting that inflation will be pushed down sharply next year and have warned of the possibility of deflation, despite inflation being at its highest level for three years.

The consumer price index rose from 4 per cent to 4.4 per cent in February.

Bank of England monetary policy committee member Andrew Sentance warned last week that inflation could rise above 5 per cent this 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 Bank of England’s 2 per cent target by 2013.

In a Treasury select committee evidence session on the Budget last week, Liberal Democrat MP for Caithness, Sutherland and Easter Ross, John Thurso, asked whe- ther the OBR’s assumptions are credible.

Capital Economics manag- ing director Roger Bootle said: “In 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 and director of macroeconomic research and forecasting Ray Barrell said the prospects for inflation are uncertain, with a 90 per cent chance that inflation will be somewhere between 0 and 4 per cent in 2012.

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 and high oil prices, will largely disappear by next year.


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David Shelton, Author, The Business of Advice Published by TaxBriefs

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