Bank of England needs to tread carefully despite inflation shock

Commenting on higher than expected inflation in February 2023, IEA Economics Fellow Julian Jessop said:

“The surprise leap in inflation in February makes it more likely that the Bank of England will raise interest rates again this week, but this is not a done deal. Even if the MPC does hike, it could soften the blow by signalling its intention to pause after doing so.

“Monetary policy should be forward looking and there are good reasons to believe that the jump in headline inflation last month was a temporary blip.

“Monetary growth has already slowed sharply and pipeline cost pressures are easing. Other official data released today showed that producer price inflation is continuing to fall, including inputs into the production of food.

“The MPC will be most worried about the rebound in the ‘core’ measure of inflation, excluding food and energy, from 5.8 per cent to 6.2 per cent. This suggests that underlying price pressures are still strong. But other news here has been reassuring, notably a slowdown in wage growth and signs that labour force participation is recovering.

“The fight against inflation should trump any concerns about the crisis in the banking sector. Nonetheless, the problems in the banks are a timely reminder that the full effects of last year’s increases in interest rates and tightening in financial conditions have yet to be felt.”


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