Don’t be tempted into believing the battle against inflation is over, a senior Bank of England official warns

Britain should not be “seduced” into thinking the battle against inflation is over, a senior Bank of England official has warned.

The Bank cut interest rates earlier this month for the first time since 2020 after inflation fell back to its 2 percent target, having peaked at 11.1 percent in October 2022.

But official figures this week are expected to show the rate rising again.

Catherine Mann was one of four members of the Bank’s nine-member Monetary Policy Committee (MPC) who voted this month to leave interest rates unchanged. She remains concerned about upward pressure on prices.

“Inflation has come down, but we shouldn’t be misled by the headline inflation numbers,” Mann told a Financial Times podcast, noting the role played by factors such as rapidly falling energy prices.

The bank cut its key lending rate to 5 percent from 5.25 percent on August 1, but warned it would not make further cuts “too much or too fast” in the coming months.

The forecast is that inflation will rise temporarily to just below 3 percent by the end of this year now that the target has been reached.

Official figures will be published tomorrow, which are expected to show that the nominal rate rose to 2.3 percent in July.

Rate-setters are monitoring underlying factors such as inflation in the service sector (which includes bars, hairdressers and law firms). The figure is still well above 5 percent, well above the general level.

Officials fear that evidence of large wage increases means these price increases are here to stay.

According to Mann, it would take years for wage growth to catch up with the price increases that have already taken place, meaning it would take a “long time” for growth to slow.

That would have a negative impact on the time it takes to reduce inflation in the services sector.

Another factor is the lack of available workers in the UK. Mann said: ‘There are a lot of vacancies, there is a lot of appetite to hire people, and there doesn’t seem to be any workers, and that is of course part of the wage formation process.’

She said wage pressures will remain a key issue next year as higher-paid employees seek pay rises in line with what some of their lower-paid colleagues received this year.

“Some people at the bottom of the ladder rightly got a big pay rise, but those at the top didn’t. So they will get a pay rise next year,” she said.

Mann added that the “exact same thing” is happening with prices, as companies follow their competitors and raise their prices.

“There is upward pressure on both the wage formation process and the price formation process. That is the upside risk. It may well be structural, given that it has emerged in this period of very high inflation,” she said.

“It will take a long time for that reinforcement to disappear.”