The Bank of England says that it is ready to act decisively if necessary to curb soaring inflation, possibly delivering a surprise half-percentage point interest rate rise as soon as this week.
Despite the risk of economic slowdown, the bank’s rate-setters may well be forced to make a 50 basis point hike after other major central banks made similar decisions in recent weeks.
Measures of inflation expectations and prices charged by companies have slowed recently but are still rising.
The main measure of inflation in the UK hit a 40-year high of 9.4% in June, prompting some economists to revise inflation forecasts to a peak of 12%. Just as much of a worry for the bank though are expectations for future inflation.
A measure of expectations in financial markets for inflation in five to 10 years’ time hit a two-year low last week but has since risen.
If high inflation expectations become normalized, this will likely lead to higher wage demands leading to an inflationary cycle.
Wages including bonuses grew by 6.2% in the three months to May, up from about 3% just before the Covid-19 pandemic but lower than the two previous monthly readings and some way behind the rate of inflation, meaning a real-terms decrease.