Domestically generated inflation (DGI) is the part of headline CPI inflation that reflects conditions in the UK economy. Headline inflation also reflects external factors such as changes in the exchange rate and world commodity prices.
DGI matters to the MPC because it provides useful information about the outlook for inflation. The influence of external factors on headline inflation will fade given enough time, so the level of DGI will determine where inflation settles.
There is a range of measures that help us judge whether DGI is rising or falling. At the moment, measures based on labour costs – the largest domestic cost facing most companies – look quite strong. Measures based on consumer services prices – which are generally provided domestically – look weaker, but have been picking up.
Chart A shows one labour cost-based measure. Unit labour costs (ULCs) are the cost of labour to produce one unit of output. The growth rate of ULCs has picked up lately as pay growth has strengthened, but growth in the amount of output produced per person has slowed.