Accelerating growth and low inflation are usually hard to reconcile. However, so far financial markets seem to believe this time will be different. It will not.
Faster GDP growth growth is going to ramp up core inflation which is now rising faster than headline CPI and is likely to reach 2% in early 2014 and then even may be squeezed towards 2.5% (more and more by demand pressures). MPC is well aware that such levels of core inflation are dangerous in case any negative supply shock happens (food prices, fuel prices) as in such circumstances headline CPI easily overshoots inflation target. It is also true that exogenously low inflation readings (generated by items to which consumers are price insensitive) stimulate consumption and – in turn GDP growth.
