Inflation Report, August 2016

Our quarterly Inflation Report sets out the economic analysis and inflation projections that the Monetary Policy Committee uses to make its interest rate decisions. The report also assesses the prospects for inflation in the UK
Published on 04 August 2016

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Financial markets and global economic developments

Following the referendum on UK membership of the European Union, sterling depreciated sharply and the prices of domestically focused risky assets have fallen. The referendum also appears to have contributed to falls in the prices of risky assets in some other economies, particularly the euro area. Elevated uncertainty and a weaker growth outlook in the United Kingdom are projected to weigh a little on the outlook for global growth in the near term.

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Demand and output

The vote to leave the European Union is likely to affect GDP growth through a number of channels, but there are currently few post-referendum data available to assess the scale of those effects. Growth was firmer than expected ahead of the referendum, but the available indicators suggest that domestic demand growth is likely to slow over the near term as greater uncertainty and lower confidence drag on activity. That is already apparent in the housing and commercial property sectors, where indicators point to significant falls in activity. The large depreciation in sterling should, however, support net trade in the near term.

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Supply and the labour market

Reflecting the weaker near-term outlook for output, capacity pressures are likely to soften in the second half of 2016. Surveys of recruitment intentions suggest that prospects for labour demand growth have eased. In part reflecting that, average hours worked are projected to fall and unemployment to pick up, leading to a widening in the degree of slack in the economy. The extent to which output recovers further ahead will depend partly on developments in supply, which will be sensitive to the eventual trading arrangements between the United Kingdom and its economic partners. In the near term, the outlook for supply growth is weaker than in May.

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Costs and prices

The rise in uncertainty and financial market moves associated with the vote in June to leave the European Union are likely to have contrasting implications for external and domestic cost pressures. The fall in the sterling ERI is projected to push up imported costs significantly. In contrast, the outlook for domestic cost growth is a little weaker, as a projected widening in the margin of spare capacity weighs on wage growth and companies’ pricing decisions. Overall, the near-term inflation outlook is higher than in the May Report.

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Prospects for inflation

The vote to leave the European Union is likely to have significant implications for the UK economic outlook. It will take some time for those implications to become clear and the projections in this Report assume that uncertainty around the United Kingdom’s future trading arrangements weighs on the outlook for both demand and supply. There are already signs of a weaker outlook: some uncertainty indicators have risen further; property markets appear to be weakening; and survey indicators of activity have fallen. The sterling exchange rate has also fallen sharply. That will, by itself, provide support to exporters, but it will also raise import prices, weighing on households’ real incomes and pushing up inflation. Overall, growth is projected to slow markedly in coming quarters, opening up a margin of spare capacity. The transition to new trading arrangements with the European Union, and companies’ uncertainty about the impact of those, could weigh on productivity growth in coming years. Supply growth is judged likely to remain below past averages throughout the forecast period. That means a pickup in GDP growth to modest rates in the second half of the forecast period begins to close the margin of slack. There are counterbalancing forces on inflation throughout the forecast period, with a boost from higher import prices and a drag from the larger margin of spare capacity. The exchange rate effect will, however, fade over time. In light of the outlook for activity and inflation, the MPC has announced a package of policy stimulus measures to support the UK economy.

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The Bank of England's press conference following our August 2016 Inflation Report.

PDF Governor's opening remarks  PDF Press conference transcript 

Data from the August 2016 Inflation Report

including conditioning assumptions, MPC key judgements and indicative projections and other forecasters' projections

Other Chart slides and data     ZIP file 

Fan charts

PDF Fan charts  Excel Current fan chart data 

August 2016 projections for CPI and GDP based on market interest rate expectations





May 2016 projections for CPI and GDP based on market interest rate expectations





Other Inflation Reports