At its February meeting the Bank of England downgraded its forecasts for the UK economy, cutting its projection for GDP from 2.5% to 2.2%, for the current year.

Given the recent weak reading from the latest Q1 data even this assessment seems a touch optimistic, which suggests we could well see another downgrade this week when the Bank of England sits down to discuss its May inflation report, as well as its latest deliberations on interest rate policy.

At that same time in February MPC member Ian McCafferty also reversed his call for a 0.25% rise in interest rates as he once again fell into line with the consensus view of most of the last 86 months, while inflation projections for the rest of 2016 were expected to remain low.

While another downgrade to the UK growth forecasts would not be a surprise, given some of the recent hysterical economic narrative being peddled around next month’s June referendum vote the outlook for inflation is looking slightly more uncertain.

At the last inflation report Bank of England officials were projecting that pricing risks were tilted towards the downside in the near term.

Since that meeting in February headline inflation has exhibited slightly more resilience than would appear to have been priced in, in fact since November last year CPI inflation has risen consistently on an annualised basis from -0.1% to 0.5% in March.

Core prices have been no less resilient almost doubling in the last 12 months, to 1.5%, while RPI has also doubled since October last year to 1.6%.

This re-emergence of price pressures while not immediately concerning in the near term does appear to be manifesting itself elsewhere in the global economy, with a sharp rise in input prices in the US manufacturing sector in data released last week. The prices paid component of the ISM manufacturing index for April saw it jump to its highest levels since September 2014.

What central bankers need to determine is whether this jump in inflationary pressures in the last few months is merely transitory in nature, given the recent rebound in energy and commodity prices from recent lows, or something slightly more sinister?

The worry is that, as has been the case for several years now that they are behind the curve and react too slowly to what might be an inflationary spike.  

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