NIESR Monthly CPI Tracker - Moderate Fall In Inflation In January Masks A Serious Fall In Real Wages
15 February 2023
Despite the fall, this rate of annual inflation remains among the highest in four decades and markedly above the Bank of England’s inflation target of 2 per cent for the eighteenth consecutive month. [...] As discussed in our recent Winter Economic Outlook, while we think that the peak in rates is high enough to bring inflation back to target around the middle of 2025, a key question will be how long the MPC should maintain the Bank Rate at its peak level, and at what pace should they loosen. [...] As shown in Figure 3 above, since the Bank of England gained operational independence in 1997, the current tightening cycle is the most aggressive in terms of pace and magnitude of rate hikes. [...] In addition, one of the reasons for the speed of the rises is that the MPC were ‘behind the curve’ in that they started the tightening cycle after inflation had already become set in. [...] Equally, if the Bank errs on the side of caution with the pace of its loosening, and in doing so, aggravates the risk of a recession by more than is needed to bring inflation back to target, it will reignite familiar critiques.