In this speech, Sarah Breeden sets out her view on why the recent “hump” in inflation is unlikely to lead to additional inflationary pressure. She notes that while the underlying disinflationary process looks to be on track, policymakers face a balancing act as they manage the risks around this outlook.
Speech
Introduction
Good afternoon and thank you for the invitation to speak here at Cardiff Business School. It’s a real pleasure to be here in Cardiff – a city that has shown the world the value of teamwork, whether through rugby at the Principality Stadium or in its history as a hub of global trade, as well as the importance of innovation, as exemplified by the regeneration of Cardiff Bay. Similarly, Cardiff Business School has been at the forefront of nurturing future leaders and thinkers, equipping them with the skills to navigate the ever-changing economic landscape. It is the economic landscape that I wish to focus on today. And specifically, the path that inflation has taken over the past year.
Inflation has come down significantly since it hit double figures in late 2022, supported by the restrictive stance of monetary policy. But the road has not been smooth. Having fallen back to our 2% target last year, headline inflation has risen again, back up to 3.8% in the latest data for August. And we think it will have increased again to around 4% for September.
This is too high. While we expect inflation to begin to fall back from next month and gradually return to target thereafter, it is right that we question the risks around this projection. Specifically, does this latest “hump” in inflation represent a mere “bump” in the road? Or is it a sign that the disinflationary process is veering off track – that inflation is proving sticky not bumpy, meaning our hump is in fact a plateau?
As I do, I’ll look at this through three lenses:
- What new shocks have we faced and are they likely to generate additional second-round effects?
- Are the old shocks playing out as expected or is there news we need to respond to?
- What have we learnt about the impact of our policy? I will then look to bring this all together and set out what it means for my policy approach going forward.
What new shocks have we faced?
This “hump” has not been a surprise. Indeed, the MPC had been forecasting a pick-up in inflation over 2025 since the time of the February MPR, with inflation then expected to rise to 3.5% in June and to peak at around 3.7% in Q3 (Figure 1). And the increase reflected factors largely unrelated to domestic inflationary forces – what I will call “external” factors – such as administered prices like water, tax and previous falls in energy prices dropping out of the annual comparison.
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