Speaking at the annual British Chambers of Commerce conference in London, the BoE governor said the UK was suffering the effects of a “second cycle” of inflation, pointing to the pervasiveness of rapid increases in energy and food prices, public wages and prices.
“Some of the strength in core inflation reflects the ripple effects of higher energy prices,” Bailey said.
“But it also reflects the effects of the second cycle of inflation, where the external shocks we’ve seen interact with conditions in the domestic economy. And with core inflation falling, those effects aren’t likely to go away. in the second cycle because quickly they appeared.”
The Bank of England has repeatedly said over the past 18 months that it was trying to end the risks of rising energy and food costs hitting wages and domestic prices, but the Bank has now admitted that she had failed in this task.
One of the good news in the economy, the governor said, is that wage growth has moderated slightly and “near-term indications are that wage growth may slow further later this year.”
But the Bank of England’s Monetary Policy Committee was waiting for more progress in the outcome of its decisions, before being satisfied that it had restored price stability to the UK economy.
Bailey said: “Inflation expectations are more ambiguous and depend on the degree of stability in determining wages and prices,” adding that “the committee will continue to closely monitor stable indicators of inflationary pressures.”
“I can assure you that the MPC will adjust the interest rate if necessary to bring inflation back to a medium-term sustainable target, in line with its mandate,” Bailey said.
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