Inflation on a ‘firm downward path’ and Bank of England risks a ‘hard landing’, MPC member says
Inflation is on its way back to target and the Bank of England risks leaving rates on hold for too long, a member of the Monetary Policy Committee (MPC) said today.
Swati Dhingra, the only member of the MPC to have backed a rate cut in the last meeting, warned that leaving interest rates on hold for too long could hit growth and impact living standards.
“Consumer price inflation is on a firm downward path, and has been for some time now,” Dhingra said in a speech at Market News International Connect.
Overtightening often comes with “hard landings and scarring of supply capacity that would weigh further on living standards,” she said.
Inflation has fallen to four per cent from peaks of over 11 per cent in October 2022, easing concerns that price pressures would prove stubborn. Dhingra pointed to two crucial indicators as evidence that the disinflationary process in the UK still had further to go.
First, she noted that producer prices, which are often seen as a lead indicator for consumer price inflation, have been on a sharp downward trend. In the year to January, producer prices fell by 3.3 per cent.
Specific data linking items in the consumption basket with items in the producer basket suggests that CPI will have further to fall in the coming months.
“Evidence from granular producer prices…(are) pointing to substantive easing of consumer price pressures in the future,” she said.
She also pointed out that the picture of consumption in the UK remains relatively weak despite the recent progress on inflation and recovery in real wages.
Consumption in the UK for December 2023 was still 2.25 percent lower that in 2019.
“Consumption has not recovered to its level before the pandemic. This is in sharp contrast to the robust growth seen in the US and the recovery in the Euro area since 2022,” she argued.
Policymakers at the Bank are increasingly facing the criticism that they risk being too slow to cut interest rates now that inflation is on its way back down to the two per cent target.
Earlier this week, Andy Haldane, former chief economist at the Bank of England, said: “It’s one thing to have missed inflation on the way up, which happened; it’s quite another to then have crushed the economy on the way down”.
However, Andrew Bailey, speaking in the Treasury Committee, emphasised that the UK was still operating at “full employment” despite the rate hikes.
The governor also pointed to the still elevated levels of wage growth and services inflation, both of which are indicators of inflationary persistence.
However, Dhingra argued that measures like wage growth were “late-cycle indicators,” meaning it takes time for the rise in interest rates to impact them.
“Monitoring late-cycle indicators therefore naturally bakes in a risk of overtightening policy,” she said.
The Bank of England left interest rates on hold for the fourth consecutive meeting earlier this month. Markets expect the Bank to start cutting rates in the summer.