Inflation to remain high, warns Ashcroft

JOHN Ashcroft, chief executive of pro.manchester,is predicting stronger economic growth this year, but fears that even with an expected rise in interest rates in the next few months, inflation will remain well above its 2% target.

In a First Quarter Economics Review, Mr Ashcroft concedes his view is “contratian” to that of many other economists, including Mervyn King, the Governor of the Bank of England.

pro.Manchester – which represents Manchester’s professional services sector – and is helping to shape the economic future of the city in partnership with public bodies such as the Commission for the New Economy, believes the economy will grow by 2.6% this year, significantly higher than consensus forecasts for growth of 1.7%.

Rather than falling back to nearer the 2% target set by the Chancellor, inflation will be around 3.6% by the end of the year, but “will not fall to target thereafter”, Mr Ashcroft says.

He believes continuing inflation in the service sector has fuelled the recent increase to 4% which have been compounded by the rise in oil and other commodity prices and the VAT hike.

He notes:  “Service sector inflation in January was 4.1%. It has averaged 3.6% for almost 20 years. That’s half the index. This was creating a problem for policy long before the fall in Sterling, the rise in VAT and the prices of commodities.”

Goods inflation will have to fall to zero, to meet the 2% target, he says, but this is unlikely to happen given strong demand in China and the Far East.

On the interest rate dilemma, Mr Ashcroft says: “The Bank of England is running out of room and stretching credibility. Views within the MPC are polarising.. More doves will morph before too long. If the first quarter GDP figures are as strong as expected, interest rates will rise as early as April or May.”

A rate rise would benefit savers, increase the value of Sterling and mitigate the impact of import prices, he argues.