U.K. Inflation Seen Persisting in Lackluster Economy

U.K. inflation will be faster than previously forecast in the next two years, constraining the central bank’s room for maneuver as the economy struggles to pick up, according to a survey of economists.

Gains in the consumer price index will average 2.5 percent in 2013, up from 2.2 percent predicted in November, according to the median forecast in the Bloomberg monthly survey of 35 economists. They also raised their median forecast for 2014 to match the central bank’s 2 percent target, up from 1.9 percent.

The results underscore the concern raised yesterday by Bank of England Chief Economist Spencer Dale that U.K. inflation may show “stickiness.” That may complicate the task of policy makers who are trying to revive the economy. Charlie Bean, the central bank’s deputy governor, said last month that the door is still open for more quantitative easing.

“The stickiness in inflation is likely to continue and the rate may rise to around 3 percent next year,” said Howard Archer, an economist at IHS Global Insight in London. “If inflation starts rising above 3 percent it’s going to become more difficult for them to justify doing more QE and keep their credibility.”

BOE Target

Inflation accelerated to 2.7 percent in October, the fastest since May, as higher university tuition fees pushed consumer-price growth further above the BOE’s target. The Office for National Statistics will publish its data for November on Dec. 18.

The central bank last month forecast inflation to be at about 1.8 percent in the final quarter of 2014, and said risks to their forecast for consumer price growth to reach the target in the medium term are “broadly balanced.”

The U.K.’s double-dip recession ended in the third quarter, though recent data suggest the rebound has faltered. Industrial production unexpectedly fell in October. The economy probably barely grew in the three months through November and the recovery next year won’t be strong enough to lower the jobless rate, the National Institute of Economic and Social Research said on Dec. 7.

BOE policy makers have argued that withdrawing stimulus to drive inflation down to their target would have worsened the strains on the economy. The Monetary Policy Committee paused its bond purchase program at 375 billion pounds ($605 billion) in November as officials focused on the prospects for their Funding for Lending program to revive growth.

Dale’s View

“The stickiness of inflation is a by-product of the real adjustment that our economy has been forced to make,” Dale said in a speech yesterday in London. “The MPC could have tried to achieve a lower rate of inflation over this period. But only by steering a course involving an even deeper recession and even higher unemployment. There are no easy fixes to these types of real adjustments.”

Economists forecast inflation of 2.7 percent this quarter, up from a previous prediction of 2.4 percent. By the third quarter next year the rate will average 2.6 percent, up from 2.4 percent.

For Germany, the median forecast of 37 economists showed German GDP will grow 0.8 percent next year, down from 1 percent previously predicted. The outlook for 2014 improved, with growth of 1.8 percent against an earlier forecast for 1.4 percent.

The overall view for the euro zone worsened for next year to a 0.1 percent contraction from 0.1 percent growth.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE