Currency watch: Inflation is here to stay

The main financial term I expect you will hear more than any other this year will be "inflation". Expect the media to preface it with words like “runaway”, “spiralling” and “extreme”, either way it will continue to rise throughout the first half of the year.

Obviously the 2.5% addition to the VAT rate is going to influence this, but the main pressures will likely come from abroad.

At the time of writing a litre of petrol currently sits at around £1.25, with a barrel of Brent crude just below the $100 level.

The way things are going these both are due to increase with some people talking about £6 gallons (an eye-popping £1.58 a litre). Given the nature of petrol this will flow through to everything else of course.
 
So shouldn’t the Bank of England do something? Well no, to be honest. Inflation is a problem that we have the tools to deal with.

The opposite, deflation, is a much trickier little devil and the Bank of England knows which one they’d rather deal with.

Of course, the toolkit consists of monetary policy and interest rate changes, but unfortunately the level of inflation at the moment would not be solved by a single twist of the wrench.

Interest rate rises also have the side effect of slowing growth so the balance has to be struck. Unfortunately growth trumps inflation at the moment and will likely do so until Q3.

Jeremy Cook is chief economist at World First foreign exchange