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Inflation to stay above target and unemployment to rise to 3 million

This is included in the latest forecast from the Centre for Economics and Business Research (Cebr), which has been voted the best GDP forecaster for 2011. The Cebr forecasts that increases in oil and commodity prices – reflecting the impact of quantitative easing in the US and Eurozone – mean that their inflation forecast has had to be raised sharply upwards from 1.7% for the last quarter of 2012 to 2.7%.

Will inflation increase as a result of rising oil and commodity prices?

Although inflation has been above its 2% target for over three years, they believe it could continue above that level for another three years. And, this stubbornly high inflation will make it difficult to achieve a rapid growth in GDP in the medium term. Although Cebr has revised its growth forecast up from minus 0.4% to plus 0.3% for 2012, they feel that growth will only average just over 1% per year up to 2016.

Unemployment is also forecast to rise to about 3 million and stay there for at least three years, in response to the low rates of economic growth.

Scott Corfe, Cebr Senior Economist said: “The Monetary Policy Committee has been dealt the worst possible hand of cards. High inflation and sluggish growth on a persistent basis mean that almost any decision the Committee makes will be wrong from at least one point of view. They will probably hold base rates until 2014 at least, and hold bank on further QE. But even that may not be enough to keep inflation near target or achieve economic growth at a reasonable rate.”

Douglas McWilliams, Chief Executive of Cebr, added: “Inflation used to be driven by labour costs. Now it is driven by high and rising demand for oil and other primary commodities from the emerging economies in the Far East. We could only opt out of this by pushing up the exchange rate to a level that made the UK even less competitive. So it looks as if inflation above target is a price we may have to pay for some time”

But this is not the only view out there at the moment. The Telegraph online has reported a story today that analysts at Standard Bank think that current economic conditions will keep commodity demand down, and therefore keep commodity prices low. They quote Mr de Wet, a leading analyst at the bank as saying: “We continue to see a physical market that reflects a consistent picture of lacklustre demand across many commodities.” He went on to say that for commodity prices to rally upwards it was necessary to see an increase in real consumption levels.

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Posted in economic growth, Inflation, unemployment

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