Inflation to fall, but interest rate is still a vital tool
Ian Derrick, deputy agent of the Bank of England’s Agency for Wales, on the outlook for inflation and the economy
CONSUMER price inflation (CPI) has started to fall but, at 10.5%, it is still very high and well above the Monetary Policy Committee’s (MPC) 2% target.
We expect inflation to fall rapidly in 2023, but to make sure that happens, the MPC has increased interest rates to 4%.
This means that since December 2021 we have increased our interest rate in total from 0.1% to 4%.
The MPC is conscious that this means many people face higher borrowing costs, but high inflation that lasts for a long time makes things worse for everyone.
We know how hard the impact of higher inflation has been on households over the past year, and that the least well off have been hardest hit.
This message has come across clearly during discussions with the public at our citizens’ panels here in Wales over the past year.
Low and stable inflation is vital so that money holds its value and people and businesses are able to plan for the future.
We know from previous experience that raising interest rates will help to bring inflation down more quickly, and then make sure it remains low.
One of the main reasons why inflation has been so high is because of past rises in energy prices due to Russia’s invasion of Ukraine.
Higher prices of goods that we buy from abroad have also played a big role.
Companies selling consumer goods struggled to get enough of them from overseas suppliers to meet higher demand from customers during the pandemic and this led to higher prices.
Additionally, there are fewer people in the UK looking for work following the pandemic.
This means that there are a lot of job vacancies and employers have to offer higher wages to recruit and hold on to staff.
This is something our agency contacts in Wales have been telling us.
In response to these higher costs, UK businesses have been increasing their prices.
Going forward, the Bank expects costs to rise less rapidly.
The UK Government has introduced a scheme that caps energy costs for households and businesses, and oil and gas prices have fallen a lot recently.
Goods prices should rise more slowly as the supply shortages many companies have faced start to ease.
And higher interest rates should reduce demand for goods and services in the economy, which will help to further slow the rate of price inflation.
Higher global energy and goods prices mean that households have less to spend on other things.
As a result, the economy has not been growing and we expect GDP to fall slightly this year.
There are still a lot of uncertainties about the outlook, and the extent to which inflationary pressures ease will depend on how the economy evolves.
The MPC will continue to monitor developments closely, including the impact of the significant increases in interest rates over the past year which is yet to fully come through.
So we have done a lot already, but we have only just begun to turn the corner on inflation.
Because of this, the MPC will continue to look closely for signs of persistent inflation when it takes its next decision on interest rates in March.