The Bank of England's fantasy forecast of a decline in annual CPI inflation to about 1% in early 2011 looks even less credible in the wake of March numbers showing an unexpectedly large rise from 3% to 3.4%.
The increase partly reflected strength in energy and food prices but "core" inflation also firmed - the CPI excluding energy, food, alcohol and tobacco rose an annual 3%, up from 2.9% in February. The significant overshoot of the 2% target cannot be attributed simply to January's VAT hike. Assuming 50% pass-through of tax changes, CPI inflation would stand at about 2.5% if VAT and duty rates had been held constant over the last year. (This estimate is derived by averaging the annual increases in the headline CPI and the CPI at constant tax rates, which is calculated assuming 100% pass-th...
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