1.13 Over the past 18 months, the economy has been hit by a series of shocks, the largest of which was the sharp increase in global commodity prices that began at the end of 2010. As Chart 1.1 shows, oil prices remain 40 per cent higher than the 2010 average due to a combination of growing demand from emerging economies and supply disruptions in the Middle East.4 Food prices also increased sharply.
1.14 High commodity prices have pushed up inflation, reducing real incomes and weighing on growth around the world. The OBR estimate that since the June Budget 2010, for the UK economy "most of the weakness can be explained by an external inflation shock constraining real household consumption".5
1.15 Forecasters expect the inflationary impact of high commodity prices to recede over the coming year and inflation to fall sharply from its current elevated level. The OBR forecast Consumer Prices Index (CPI) inflation to fall sharply in the first quarter of 2012 as the January 2011 VAT increase falls out of the annual comparison. The OBR forecast inflation to fall to 2.4 per cent in 2012 Q4 and to return to the 2 per cent target by the end of 2013, as external pressures fade and the disinflationary impact of spare capacity in the economy bears down on inflation. Lower inflation will provide a degree of support to real incomes and the recovery.
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4 The average price of Brent crude was around $80 in 2010. If the oil price remains at its current November level for the remainder of the year, the average price of Brent crude in 2011 would be $112. This would represent a 40 percent increase compared with 2010.
5 Economic and fiscal outlook, OBR, November 2011.