Visual summary - Inflation Report November 2018

The outlook for the economy

In a nutshell

Hand with a banknote and an increasing sign

Pay is rising at a faster rate

Speed sign at 1.5%

The UK economy is growing just above its speed limit

Percentage symbol and an increasing sign

Interest rate rises should be gradual and limited...

Gauge indicating 2%

...and are expected to bring inflation back to our 2% target

United Kingdom and Europe flag

The nature of Brexit will affect the UK economy

Our role is to set to influence the amount of spending in the economy in order to ensure inflation (the pace of price rises) returns to our 2% target sustainably.

Low and stable supports growth and jobs.

Over the past few years, our economy has needed interest rates to stay very low as we recovered from the global financial crisis.

But things have been changing.  Our economy now needs a little less support because it is growing a little faster than it has capacity to and inflation is above our 2% target. To ensure a sustainable return of inflation to the target, we need to keep the economy growing at around its speed limit.

That is why we raised the official interest rate from 0.5% to 0.75% in August.

After raising interest rates in August, this month we have left them unchanged. If the economy performs as we expect, we think we will need to raise interest rates a bit more over the next few years. We expect any rises in interest rates to happen at a gradual pace and to a limited extent. Interest rates are likely to remain substantially lower than a decade ago.

  • View chart See how low Bank Rate is compared with the past
    Chart showing the Bank Rate from 10 years ago till now

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Pay is rising at a faster rate

Pay rises for most people had been low in recent years. But pay is now rising at a faster rate giving some households more money to spend. Pay is also rising a little faster than prices, unlike in 2017, easing the squeeze on people's living standards.

That squeeze should ease further over the next few years. The share of people out of work is at its lowest level for more than 40 years. And there are a lot of job vacancies. This means that companies need to compete hard with each other to recruit and retain workers. One way they do that is by offering higher pay. We are expecting further pay rises in coming years. 

That greater spending power should support growth in the economy.

Two hot air balloons. One is Pay, the other is Prices

Pay has started to rise faster than prices, easing the squeeze on living standards

  • View chart See how pay is starting to rise faster than prices
    Chart showing pay and prices

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The UK economy is growing just above its speed limit

Higher pay and low interest rates are supporting spending by UK consumers.

Strong growth in other countries has also increased the demand for our of goods and services.

As a result, the UK economy has grown steadily recently after a temporary dip at the beginning of the year.

We think our economy is probably growing about as fast as it has capacity to without pushing up prices quickly.

A few years ago many people were out of work and looking for jobs. So there was scope for the economy to grow quite quickly as a lot of those people found work.

Now, with a record number of people in work and businesses finding it hard to recruit, there isn't much more economic growth that can come simply from unemployed people finding work.

Instead, it will mostly need to come from higher

– people already in work producing more.

Find out more about how fast the UK economy can grow.

Speed limit sign

The UK economy is growing just above its speed limit

We aim to bring inflation back to our 2% target

The prices of the things you buy have been going up by more than our 2% target on average over the past year.

That’s been mainly due to the big fall in the pound following the Brexit vote.

The lower pound has meant that things businesses get from abroad cost more. Businesses have been passing those rising costs on to their customers. So that has meant higher prices in the shops.

The price of oil and gas has also risen substantially over the past year. That has pushed up petrol prices and your gas and electricity bills.  

Most of the increase in inflation due to the fall in the pound has now happened.  

But higher pay is now putting upward pressure on companies' costs and the prices they charge.

So with the economy growing a little faster than it has capacity to, we think that a gradual and limited increase in interest rates over the next few years is needed to bring inflation back towards our 2% target.

Arrow hitting the target board

We aim to bring inflation back to our target

  • View chart See how inflation is expected to fall back towards our 2% target
    Chart showing how inflation rate against the 2% target

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The nature of Brexit will affect the UK economy

In March 2019 the UK is set to leave the European Union.

Negotiations about the future relationship between the UK and the EU are ongoing.

The path of the economy will depend on the outcome of those negotiations.

The nature of Brexit is likely to affect spending by companies and households.  Depending on what happens, people might spend more if their uncertainty about their future income goes down, or they could spend less if they think Brexit will make them worse off.

The nature of Brexit could also affect companies’ ability to supply goods and services. For example, there could be delays at the border or disruption to supply chains. If that happens, the speed limit at which the economy can grow will be lower. 

Brexit could also affect the value of the pound depending on how people in financial markets respond to the type of Brexit.

How we set interest rates in response to Brexit will depend on the balance of its effects on demand, supply, and the value of the pound.

Whatever happens, we will set interest rates to ensure we meet our 2% inflation target and support the economy.

The nature of Brexit will affect the UK economy

The nature of Brexit will affect the UK economy

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