The Bank of England needs to balance upward pressures on inflation stemming from higher energy costs with downward pressures should the economic slowdown prove prolonged, according to policymaker Andrew Sentance. In a paper published in the World Economic Journal, Sentance warns that recent shocks from global financial and commodity markets means the economy could be in for "a bumpy ride" in the near term.
The paper is based on an off-the-record lecture Sentance gave in Oxford on January 29 but some of the information has been updated to reflect more recent data. The Bank of England was unable to say when it was updated. "The upward price pressures from global commodity markets, coupled with the impact of a relatively weak pound, are likely to push inflation up and away from its target rate in the first half of 2008," Sentance says.
"Looking further ahead, there are downside risks to inflation as well. The problems in the financial sector and the consequences for the real economy are still unfolding, and their full impact is still very uncertain.