Bad news for students, but not so bad news for inflation

The Bank of England’s Inflation Report was less hawkish on the future path of inflation than we’d expected. The Bank’s targeted measure of inflation is forecast to return to its 2% target level by the middle of 2007, rather than 2008 as predicted in August’s Inflation Report. Given these projections are based on the market’s interest rate forecast (currently around 5.1% for 2021/12), this could imply that no more rate hikes are necessary during this cycle. Why the change since August?

Rising unemployment might be one reason, but perhaps most important was yesterday’s low inflation print. The market had expected CPI to rise by +2.6% year on year. In fact it came in at +2.4%, with weakness in the prices of furniture, fuel prices, clothing and electrical goods. The biggest shock was that the expected huge hike in university tuition fees failed to materialise. This should have added 0.3% to CPI, but only added 0.12%. Apparently the statisticians had not realised that postgraduate fees were only going up by 4%, rather than the 50% hike seen for the poor undergraduates, and this explains the surprise!