Bank of England’s Bailey sweats over risk of ‘sticky’ summer for inflation

BANK of England (BOE) governor Andrew Bailey said he was concerned about the risk of “sticky and stubborn” inflation over the summer after data showed food prices still rising sharply despite a drop back to single digits for the headline inflation rate in April.

Bailey, who this week came under fierce criticism from lawmakers after inflation spent eight of the previous nine months above 10 per cent, sought to underscore his commitment to getting price growth back to the BOE’s 2 per cent target.

Data published earlier on Wednesday (May 24) showed the consumer price index rose by 8.7 per cent in annual terms last month. That was down from 10.1 per cent in March and a peak of 11.1 per cent last October but was higher than expected by economists polled by Reuters.

It also left Britain with the joint-highest inflation rate among Group of Seven advanced economies along with Italy, despite 12 consecutive interest rates increases by the BOE with more now seen as inevitable.

Bailey, speaking at a Wall Street Journal (WSJ) event, said the fall in April’s inflation rate was “welcome” but the BOE had to focus on food prices which were up 19.0 per cent over the 12 months to April, and core inflation which gathered steam.

While inflation expectations were falling and companies were sending signals that they intended to slow their price increases, there were risks that inflation would fall only slowly from now on, he said.

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Food companies had signed up for contracts that represented higher-than-usual costs after last year’s energy price surge, meaning a fall in raw material prices could take a long time to work its way through to consumers.

“The question for us is how ... sticky and stubborn is this sort of process down, and bear in mind we’ve got a very tight labour market in this country,” Bailey said.

But he said the word “spiral” was not the best way to describe how wage pressures and inflation were interacting.

Rate hikes ahead

Investors appeared to have made up their minds already about the job ahead for the BOE, pricing another quarter-point rate hike next month as a 100 per cent certainty and putting a roughly 50-50 chance on Bank Rate hitting 5.5 per cent by November, up from 4.5 per cent now.

Bank of America and Japanese bank Nomura said they now expect the BOE to raise its main interest rate three more times to 5.25 per cent by September, while Credit Suisse and Citi see two more increases to 5 per cent.

Many other monetary authorities are also grappling with how much more needs to be done to tame inflation.

The European Central Bank has committed to raising borrowing costs again in June and a long list of policymakers have said that another move in either July or September is likely.

But the US Federal Reserve is seen as possibly having hit a peak for borrowing costs with the next move most likely a cut later this year, according to investors.

Asked at the WSJ event if Prime Minister Rishi Sunak was on target to halve inflation this year, as he has promised voters, Bailey said it was too soon to be certain.

“I think we’re going to have to see how the news and the evidence unfolds,” he said.

Bailey reiterated the BOE’s message of recent months that it is watching the economic data when making rate decisions, having signalled previously that it was likely to keep on raising borrowing costs.

“Our commitment is absolute that we will bring inflation back down to target,” he said. REUTERS