BoE’s Breeden dismisses worries over UK’s persistent inflation

The increase in UK inflation over recent months will be temporary and not lead to significant second-round effects, the Bank of England’s deputy governor for financial stability has claimed.

Speaking at an event at Cardiff University on September 30, Sarah Breeden said she had “not seen any evidence yet to suggest that the underlying disinflationary process from past shocks is veering off-track. So far so good.”

Headline inflation in the UK was 3.8% in August, the same level as the previous month but higher than the 3% recorded at the start of the year. The figure for September, which will be released on October 22, is expected to reach 4%.

Breeden believed the flare-up had been the result of “external factors” that were “largely unrelated to domestic inflationary forces”. These included increases in administered prices, such as taxes and water bills.

She added that the rise in food inflation – which reached 5.1% in August – had been due to “a sharp increase in some agricultural commodity prices” that provided “little signal on domestic inflationary forces”.

These external factors, Breeden said, could lead to persistent inflation if they affected inflation expectations from households and businesses, as had been the case in 2022.

However, she noted that the labour market was looser now than it was then, and that this made it harder for workers to demand higher wages. She added that demand was also weaker now, in part because of the BoE’s restrictive monetary policy, which had reduced firms’ ability to pass wage increases through to prices.

“[Inflation] is too high and it is our job to return it to target sustainably,” the deputy governor emphasised. “The good news is that this ‘hump’ reflects external shocks, and in the current environment it is unlikely, in my judgement, to lead to additional inflationary pressures.”