OBR raises UK inflation projections

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UK CPI inflation is set to reach 1.8 per cent by the second half of 2017 as it closes in om the Bank of England’s target of 2 per cent, figures from the Office for Budget Responsibility show.

The return of inflation to near the Bank of England’s target is expected to be “a little faster” than expectations in July, the OBR says.

Inflation is set to “rise slightly” in the final quarter of 2015, driven partly by the rise in the prices of goods and services and “some of last year’s petrol price falls dropping out of the annual inflation comparison”.

In July the OBR predicted that CPI inflation would hit 1.6 per cent in 2017, rising to 1.8 per cent in 2018 and reaching the target 2 per cent in 2020.

The OBR also says inflation is forecast to rise “more significantly” in the first quarter of 2016.

The OBR says: “This change in our forecast is almost entirely due to our assumptions about the effect of unit labour costs. As wage growth is forecast to pick up faster than productivity growth over the next few years, firms are expected to pass through some of the associated increase in costs to consumers in higher prices.”

According to the latest inflation report by the bank of England, the UK CPI measure of inflation is expected to stay below 1 per cent until the second half of next year, reflecting the “continuing drag” from commodity and other imported goods prices.

The BoE said the outlook for global growth has weakened since August as “many emerging market economies” have slowed “markedly”.

CPI inflation was at -0.1 per cent in October this year, according to the Office for National Statistics.