Inflation Risks Prove Longer-Lasting Than Forecast, Warns Bank of England Member

Strategic Insights -

Megan Greene, a member of the Bank of England's Monetary Policy Committee, has expressed concerns that recent rises in inflation may persist for longer than anticipated, posing challenges for policymakers. In her speech at the National Institute of Economic and Social Research, Greene highlighted the likelihood of stubborn inflation rates of around 3.5% for the remainder of the year, fueled by wage rises and price hikes in the UK. She attributed the persistence of food prices to the Israel-Iran conflict, which could further increase oil prices and put upward pressure on inflation. Greene also noted that underlying economic activity remains weak, and consumer spending is likely to face pressure as borrowers roll off fixed rates onto deals with higher interest rates, while the jobs market cools.

Key Takeaways:

  • Megan Greene, a Bank of England Monetary Policy Committee member, has warned that recent inflation rises may be more persistent than forecast, potentially leaving policymakers in an "uncomfortable place."
  • Greene cited stubborn inflation rates of around 3.5% for the remainder of the year, fueled by wage rises and price hikes in the UK.
  • The persistence of food prices has been attributed to the Israel-Iran conflict, which could push up oil prices and increase inflation.
  • Underlying economic activity is weak, and consumer spending is likely to face pressure as borrowers roll off fixed rates onto deals with higher interest rates.
  • The jobs market is cooling, and the risks remain skewed to the downside on growth and to the upside on inflation.
  • Greene emphasized the importance of a gradual approach to removing monetary policy restrictiveness, given wider uncertainty and escalating conflict in the Middle East.
  • The Bank of England has left the door open to a potential interest rate cut in August, when it will have its next set of quarterly forecasts.

Statistics:

  • Inflation rate: around 3.5% for the remainder of the year
  • Food price inflation rate: 4.7% more expensive than a year ago
  • Consumer spending: likely to face pressure as borrowers roll off fixed rates onto deals with higher interest rates
  • Jobs market: cooling, with potential for increased unemployment
  • Interest rates: 4.25% (current rate), with potential for cut in August
  • Quarter: August (next set of quarterly forecasts)

Sources:

  • Holly Williams, "Bank of England interest rate-setter warns of 'long-lasting' inflation", [The Telegraph](https://www.telegraph.co.uk/business/2023/08/01/bank-england-interest-rate-setter-warns-long-lasting-inflation/)
  • Megan Greene, speech at the National Institute of Economic and Social Research (Niesr), [Bank of England](https://www.bankofengland.co.uk/news/2023/july/monetary-policy-committee-member-speech)