Although the slide in the trade-weighted sterling index of a little below 10% since the referendum result will give exporters a much-needed boost to their competitiveness, it will also lift the prices of imported materials and finished goods, leaving the MPC with an awkward trade-off between minimising a short-term hit to the economy and overshooting its inflation target.
It seems reasonable to think that almost all of the recent movements in sterling will be reflected in import prices fairly quickly and that 30% or so of this rise may be passed through to the CPI – although this upward pressure could be mitigated to some extent by the weaker economic environment. Accordingly, we now expect inflation to rise from 0.6% this year to 2.2% in 2017 and 2.8% in 2018 (compared with 1.5% and 2.1% in 2017 and 2018 in our forecasts made prior to the referendum).
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