The Bank of England requires the assistance of both government policy and those who determine wages, and the road ahead is likely to be fraught with challenges.
The likelihood of the Bank of England opting for a 50 basis point increase is increasing due to a persistent surge in core inflation. This escalating inflation is imposing further pressure on the Bank to regulate the economy more effectively.
Paul Dales, the UK’s leading economist at Capital Economics, expressed his concern. He said that the ongoing acceleration in core inflation and wage growth signifies that domestic inflationary pressures are intensifying.
This implies that the Bank might face more challenges compared to the Federal Reserve or the European Central Bank.
We predict an imminent 25bps rise in interest rates, coupled with more assertive signals. These are likely to be succeeded by two additional hikes, leading to a peak of 5.25 percent over the next few months.
However, the Bank might adopt a more aggressive approach and increase rates by 50bps as early as tomorrow. This could necessitate interest rate hikes beyond 5.25 percent to effectively curb core inflation.
Melissa Davies, Redburn’s lead economist, referred to the UK’s inflation data as “extremely disconcerting”. Her words were:
Persistent inflation is seen across the UK, with both consumer goods and services consistently escalating the price pressure.
One key reason for the significantly lower inflation in the US is the fall of durable goods inflation to zero. This is not the case for the UK, where the core CPI for goods and services both show high single-digit numbers.
The delayed impact of energy price fluctuations accounts for about one percentage point of the current headline rate, which will primarily surface in July. However, this still leaves the economy grappling with a substantial inflation problem (as the influence of fuel prices is already in the negative).
While it’s easy to criticize the Bank of England for overlooking the inflation surge, it’s also true that, arguably, the UK’s fiscal policy has been excessively lenient for an extended period post-pandemic.
With wage inflation at approximately 7pc and the persisting high rates of underlying services and goods inflation, the path to control UK inflation is far from short.
