Guernsey Inflation Outlook report released

Wednesday 18 August 2010

This is the third quarter edition of ‘Inflation Outlook’: a Policy Council report providing forecasts for inflation. The forecasts are based on econometric models and provide a composite forecast of RPIX and RPI. These forecasts are revised and published on a quarterly basis in the month following the Policy Council’s publication of official Guernsey quarterly inflation rate and timed to follow the Bank of England’s quarterly inflation outlook .

NB - Forecasts are presented with statistical confidence (or error) bands (the shaded area). These represent the range of possible outcomes with (in this case) a 95% statistical certainty.

Headlines
• As anticipated, the most recently reported Guernsey inflation rates were somewhat lower than those in the UK. This is forecast to continue although the expectation is for UK inflation to subside in the next quarter.

• RPIX, the official headline rate, is forecast to remain relatively benign over the next few quarters. Second quarter RPIX was actually below the target maximum of 3.0% (as set out in the Fiscal and Economic Plan) at 2.4%. It is anticipated to rise marginally over the next three months but remain below the target rate.

• There may be some continued upward pressure from oil prices although at reduced levels to those experienced over the past year. However this could be mitigated or even reversed if Sterling continues its recent improved performance against the dollar.

• Both measures of inflation (RPIX and RPI) are expected to rise gently towards the end of the year but, absent any unforeseen circumstances, they should remain at ‘comfortable’ levels, with RPIX on or around target.

• Risks to the UK economy of reduced domestic demand could well act to dampen inflation through the course of 2011, but our belief is that rising expectations and VAT increases will most likely keep UK inflation above target.