MPC meeting: Eye watering price increases force Bank of England to raise interest rates
Higher energy prices due to the Russia-Ukraine conflict, alongside previously announced increases in National Insurance Contributions expected in April, will put a further significant cost of living squeeze on UK households.
Households are paying more for essentials such as filling up the car at the pump and energy bills. Food is very energy intensive so households will need to spend more on food essentials as well.
That cost of living squeeze will likely weigh on the UK economy as consumers economise on more discretionary items, like restaurant meals and holidays.
The MPC is mindful that higher rates will act as a further drag on growth.
So why is the Bank raising rates?
A key factor is what is happening to wage growth and inflation expectations against a backdrop of higher than expected inflation outturns that are expected to peak at over 8% in the next few months.
These are truly eye watering rates of prices increases last seen in the early 1990s, just before inflation targeting was adopted here in the UK to get a handle on runaway inflation.
Although the shock to energy prices is not expected to be repeated, there are clear signs that nominal wages and medium term inflation expectations have been drifting up and are now running at levels above the Bank’s 2% inflation target.
The MPC is very keen that higher inflation prints due to external factors do not get embedded in the UK domestic economy.
Foto/Quelle:Â Katharine Neiss – PGIM Fixed Income
