Inflation Report

Inflation Report, May 2008
In the United Kingdom, output growth moderated and surveys point to
further easing. Indicators of household spending were mixed, while the
investment climate worsened. International prospects deteriorated,
especially in the united States. Stresses in global financial and
credit markets intensified in March but latterly there have been signs
of improvement. Sterling depreciated further and in April the MPC cut
Bank Rate by 0.25 percentage points.
Under the assumption that Bank Rate moves in line with market yields,
the Committee’s central projection is for output growth to slow
further over the next year and then recover. But there is a risk that
the slowdown may be more prolonged.
CPI inflation was 2.5% in March. Energy and import cost pressures
increased. Pay growth remained muted but measures of household
inflation expectations rose. In the central projection, higher energy
and import prices push inflation up sharply in the near term. The
emerging margin of spare capacity, together with a declining
contribution from energy and import prices, then brings inflation back
to around the 2% target in the medium term. The conflicting risks to
inflation from a more prolonged slowdown in demand growth and from the
impact of persistently elevated inflation on inflation expectations
have both increased since the February Report. Overall, the balance of
risks is presently judged to lie to the upside.

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