Aug 01, 2022 05:56AM ET
By: AnalysisWatch
The Bank of England says it will act forcefully if necessary to prevent the pickup in inflation from becoming a longer-term problem, meaning it could carry out a rare interest rate hike of half a percentage point as soon as this week.
These are some of the issues that Governor Andrew Bailey and his colleagues will take into account when assessing the persistence of inflationary pressures ahead of their next monetary policy announcement, scheduled for 1100 GMT on Thursday.
Bank of England rate-setters may feel they need to raise rates by 50 basis points after other central banks have sharply raised borrowing costs in recent weeks, despite the risk of an economic slowdown or recession.
Britain's main measure of inflation hit a 40-year high of 9.4% in June, prompting some economists to raise their forecast for peak inflation to 12%. But central banks are often equally concerned about future inflation expectations.
A measure of financial market expectations for inflation five to ten years out reached its lowest level since April 2020 last week, but has since risen.
If high inflation expectations take hold, they could lead to higher wage demands, which, in turn, could fuel more inflation in the future.
Wage growth has accelerated, but much of the increase is due to one-off bonuses to attract or retain staff, as employers struggle to find candidates to fill their jobs.
In addition to through wages, high inflation could also embed itself in the economy if companies continue to raise their prices in response to rising costs.
Increases in prices charged by companies, as measured by the S&P Global/CIPS Purchasing Managers' Index, were the highest since records began in 1999. But that pace, while still high by historical standards, slowed somewhat in May and June and cooled more significantly in July.
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