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Inflation will spike in 2021 but then fade, says Oxford Economics

CPI inflation will accelerate sharply this year, breaching the Bank of England’s 2% target, according to Oxford Economics. But the pickup will be largely due to base effects from the abnormally low inflation last year, says OE adding, “and we think long-running disinflationary forces will reassert themselves next year.”

Andrew Goodwin at Oxford Economics said: “The inflation spike will be concentrated in the fuel and energy components. Ignoring VAT-related volatility, we expect core inflation to remain subdued, particularly given the prospect of sterling strengthening. The MPC has been clear that a strong recovery is the key to lifting inflation up to 2% on a sustained basis. Any hawkish shift would be based on evidence the recovery is out-performing expectations, not on a transitory rise in inflation.”

The combination of plunging energy prices and the government’s attempts to kick-start consumer spending meant that 2020 was a year of very low inflation in the UK, with the CPI measure averaging just 0.9%. However, Goodwin says that 2021 will be very different, with CPI inflation set to rise above the 2% target before year-end.

He added: “But, in large part, the pickup will be due to the base effects caused by last year’s price movements, and we expect long-running disinflationary forces to dominate again, once the temporary factors have washed through.”

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