In a speech at the UK Women in Economics Annual Networking Event, Sarah Breeden, deputy governor of financial stability at the Bank of England, provided an update on inflation performance, amid ongoing global and domestic challenges.
Breeden emphasised the unprecedented nature of recent economic shocks, including Brexit, the Covid-19 pandemic, and geopolitical tensions, which have resulted in heightened volatility.
Breeden highlighted two key lessons drawn from recent economic developments – first demonstrating increased uncertainty regarding demand resilience, partly due to uncertainty surrounding the transmission of monetary policy.
Second, she observed that wages and prices have displayed stickiness, with inflationary pressures persisting despite efforts to contain them.
Discussing inflation, Breeden noted a decline in headline CPI inflation to 4.0% in December, reflecting a positive trend attributed to fading global inflationary shocks and higher interest rates.
Input cost pressures have eased, particularly in core consumer goods inflation, but services inflation remains above 6%, indicating ongoing challenges.
Regarding wage growth, recent data showed a slight decline to 6.5%, although it remained elevated compared to historical averages.
According to Breeden, the next few months will be crucial for assessing wage and price persistence, with the majority of this year’s wage settlements expected to conclude by April.
She underscored the importance of considering multiple factors in assessing the inflation outlook, including inflation expectations, labour market conditions, and broader economic trends.
Despite uncertainties, she expressed confidence that downside risks to demand are less likely to materialise, while concerns about persistent inflation have diminished somewhat.
Highlighting the MPC’s shift in focus towards evaluating how long current interest rates should be maintained, Breeden said: “I […] want to be focused on how real-world outcomes are evolving to tell me how well this forecast is capturing the dynamics of the economy.
“In particular, I will look at how pay growth and demand are influencing firms’ pricing decisions, to assess how persistence is evolving in relation to what is embodied within our forecast.
“And that will allow me to be more confident that inflation will return sustainably to target in the medium term.”
