UK inflation may “plateau” and linger this year, rather than rising over a “hump” before quickly falling back again, warns Bank of England policymaker Megan Greene.
The cost of living held steady at 3.4% in the 12 months to May, according to the latest Office for National Statistics data.
Monetary Policy Committee member Greene voted to leave interest rates on hold at 4.25% in a 6-to-3 split last week, with deputy governor Dave Ramsden, Swati Dhingra and Alan Taylor arguing for a 25 basis points cut.
“We expect inflation to resume its fall towards our target from early next year,” said Greene at a National Institute of Economic and Social Research conference in London this morning.
“However, there is a risk that elevated inflation of roughly 3.5% the rest of this year will feed through into inflation expectations, and therefore wage and price setting behaviour.”
Greene outlined how high inflation costs may prevent rate-setters from cutting rates twice more this year as traders expect.
She said: “Aside from energy and regulated prices buoying inflation, food prices have surprised consistently to the upside.
“Energy and food prices are particularly salient for inflation expectation setting. Household inflation expectations have been rising for months and are at the upper end of the band we might expect given consumer prices.
“Business expectations are also elevated but are less out-of-line with the past. I think the risk that our near-term plateau in inflation feeds through into second-round effects is skewed to the upside.”
Greene, one of the more hawkish rate-setters, added that she currently saw the balance of risks “skewed to the downside on growth and to the upside on inflation”,
“This is an uncomfortable place to be for a central banker,” she added.
