Bank of England Inflation Report 2011

CPI inflation remained well above the 2% target but the recent weakness in underlying output

growth persisted. The recovery in the world economy was maintained and is expected to support

growth in the United Kingdom, as should the considerable stimulus from monetary policy and the

current level of sterling. But the continuing squeeze on households’ real incomes is likely to weigh

on demand, especially over the next year or so. Further ahead, the chances of four-quarter GDP

growth being either above or below its historical average rate are judged to be roughly balanced.

CPI inflation is likely to rise further this year and is more likely than not to remain above the target

throughout 2012. The near-term profile is markedly higher than in February, largely reflecting

renewed increases in energy prices. Inflation is likely to fall through 2012 into 2013 as the impact of

external price pressures and the increase in VAT dissipates and some downward pressure from a

margin of spare capacity persists. But the timing and extent of that decline in inflation are both

highly uncertain. Under the assumptions that Bank Rate moves in line with market interest rates

and the stock of purchased assets financed by the issuance of central bank reserves remains at

£200 billion, the chances of inflation being above or below the target in the medium term are

judged to be about the same.

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