What's happened
The Bank of England faces pressure from rising wages and inflation, with policymakers warning that rate cuts may be limited this year. Recent data shows inflation at 3.4%, driven by wage growth and external factors like US rate cuts, complicating efforts to reach the 2% target.
What's behind the headline?
The Bank of England's monetary policy outlook is now more uncertain due to persistent wage growth and inflation expectations. The recent inflation data at 3.4% suggests that inflation may take longer to return to the 2% target, especially if US rate cuts boost UK demand. The Bank's previous underestimation of inflation's persistence highlights the challenge of controlling inflation without stifling growth. Rising business costs and job cuts, particularly in hospitality, indicate ongoing economic pressures. The likelihood of rate cuts before June has diminished, as inflation and wage pressures remain elevated, complicating the Bank's balancing act between supporting growth and curbing inflation.
What the papers say
The Guardian reports that policymakers are concerned about wage-driven inflation, with recent surveys showing employers planning pay rises of 3.5% or more. The Independent and AP News confirm inflation at 3.4%, driven by tax increases and holiday travel, with economists predicting a downward trend toward 2%. Both sources highlight that the Bank of England underestimated inflation's persistence after energy shocks, with the Bank's own report acknowledging this misjudgment. The recent business survey from S&P Global indicates rising costs and job cuts, especially in hospitality, which may slow economic recovery and influence future rate decisions.
How we got here
Recent UK inflation figures have increased slightly, driven by higher taxes and holiday travel costs. The Bank of England previously underestimated inflation's persistence after energy shocks in 2022, due to rising inflation expectations and wage pressures. Wage growth remains strong, with surveys indicating rising costs among businesses, which could hinder rate reductions.
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