Huw Pill, Wales Week in London, Institute of Directors
SPEAKING POINTS
- The Monetary Policy Committee (MPC) recently published its latest forecast for the UK economy. In the Committee’s central projection, aggregate economic activity (as measured by real GDP) is projected to fall slightly over the coming quarters, as high energy prices and the path of market interest rates continue to weigh on spending in an environment of weak potential growth. But the projected decline in output is much shallower than that embodied in the Committee previous forecast (published in November), reflecting the recent decline in wholesale energy prices and the Committee’s reassessment of the outlook for consumption on the back of expectations that a slower rise in unemployment will support household confidence. Survey indicators that have become available since the publication of the forecast have surprised to the upside, suggesting that the current momentum in economic activity may be slightly stronger than anticipated. And by the end of the forecast horizon, annual GDP growth reaches nearly 1%.
- The unemployment rate begins to rise from the second quarter of this year, reaching around 51⁄4% by end-2025. But, consistent with some hoarding of labour by companies, in its February forecast the MPC took the view that the expected softening of labour demand as economic activity stalls is less likely than usual to be reflected in higher redundancies. With the risk of job loss reduced as a result, the Committee judged that precautionary saving by households would be more modest – and consumption therefore stronger – than had previously been assumed.
- In the MPC’s February forecast, CPI inflation falls back sharply from its current very elevated level of 10.1% in January to around 4% towards the end of this year. The bulk of this fall reflects base effects as the impact of previous rises in wholesale energy prices on household utility bills that enter CPI inflation drop out of the annual calculation. CPI inflation is projected to fall to below the 2% target by the end of the forecast horizon, as increased economic slack reduces domestic inflationary pressure. However, there are considerable uncertainties around this outlook, and the MPC continues to judge that the risks to inflation are skewed significantly to the upside.
- These upside risks arise in large part from the possibility that domestic inflationary pressures prove more persistent than anticipated, owing to so-called ‘second round effects’ in price, cost and wage setting behaviour.
- In our central projection, annual private-sector regular pay growth begins to decline from the second quarter of this year. This already incorporates some ‘catch-up’ in nominal wage growth following the sharp rise in CPI inflation caused by energy price increases. But given the tightness of the labour market and currently elevated level of CPI inflation, there are risks around this projection. For instance, the latest data for private sector regular pay growth – which was published after the MPC’s forecast was finalised – surprised slightly to the upside.
- Moreover, the strength of corporate pricing power and disrupted supply chains may support firms’ expectations that higher labour costs can be passed through to consumer prices, as well as offering opportunities to build margins.
- That said, some high-frequency indicators of wages have fallen quite sharply recently, such as the KPMG/REC permanent staff salaries index. The MPC will continue to monitor indications of persistence in domestic inflationary pressures closely, with a focus on developments in the labour market, in wage dynamics, in services price inflation and in measures of underlying inflation and inflation expectations.
- As always, the MPC will act to meet its price stability mandate through achieving the 2% inflation target on a sustained and lasting basis.
Disclaimer: The views expressed in this speech are not necessarily those of the Bank of England or the Monetary Policy Committee.
I would particularly like to thank Lena Anayi for helpful discussions in the preparation of these speaking notes. The text has also benefitted from helpful comments from Catherine Mann and Silvana Tenreyro, for which I am most grateful.
Opinions (and all remaining errors and omissions) are my own.
