The rate of is the measure of how quickly prices have gone up. In March, prices had risen by 7% compared to a year ago. That is well above our 2% target.
Higher prices for goods is one of the main reasons for this. As economies around the world opened up after Covid restrictions eased, people started to buy more goods. But the people selling these have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad.
Higher energy prices have also played a big role. Large increases in oil and gas prices have pushed up petrol prices and energy bills.
Services inflation is picking up a little.
Russia’s invasion of Ukraine has led to more increases in the prices of energy and food.
We expect inflation to rise further to around 10% this year.
Prices are likely to rise faster than income for many people. That means that people will be able to buy less with their money. The UK economy has been recovering from the effects of Covid, but we expect the increased cost of living to lead to slower growth overall.
The Bank of England can’t do anything about the global supply problems or the energy prices that are currently pushing up inflation.
But we do have tools to make sure inflation comes back down to our 2% target. The main tool we use to bring inflation down is to increase .
We raised the UK’s most important interest rate (Bank Rate) from 0.1% to 0.25% in December 2021, to 0.5% in February 2022, and then again to 0.75% in March.
This month we have raised Bank Rate to 1%.
We expect inflation to fall back next year and be close to our target in around two years.
We may need to increase interest rates further in the coming months. But that all depends on what happens in the economy. In particular, we will be watching closely what is likely to happen to the rate of inflation in the next year or two.
Higher energy and goods prices have pushed inflation to 7%
In March, prices had risen by 7% compared to a year ago. That is well above our 2% target.
Higher prices for goods that we buy from abroad is one of the main reasons for this. As Covid restrictions have eased in many countries, people started to buy more things. But the people selling these have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad.
Higher energy prices have also played a big role. Large increases in oil and gas prices have pushed up petrol prices and energy bills.
Services inflation is picking up a little.
Higher prices for goods, as well as higher petrol prices and energy bills, have pushed inflation to 7%
We expect inflation to rise to around 10% this year, and the economy to slow
Russia’s invasion of Ukraine has led to more large increases in the price of things like energy and food.
We think this means there may be a further rise in the price cap on energy in October 2022.
Both the war and lockdowns in China are making it harder to import things. This is likely to push up some goods prices.
As a result of these factors, we expect inflation to rise to around 10% this year.
Prices are likely to rise faster than income for many people. That means that the cost of living for many people will rise.
The UK economy has been recovering from the effects of Covid, but we expect the increased cost of living to lead to slower growth overall.
We expect growth in the UK economy to slow
We’ve put up interest rates to help inflation return to our 2% target
The Bank of England can’t do anything about the global supply problems or the energy prices that are currently pushing up inflation.
But we do have tools to make sure inflation comes back down to our 2% target.
The main tool we use to bring inflation down is to increase interest rates. Higher interest rates make it more expensive for people to borrow money and encourage them to save. That means that, overall, they will tend to spend less. If people on the whole spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation.
To support inflation returning to our 2% target, we raised the UK’s most important interest rate (Bank Rate) from 0.1% to 0.25% in December 2021, to 0.5% in February 2022, and then again to 0.75% in March.
This month we have raised Bank Rate to 1%.
We may need to increase interest rates further in the coming months. But that all depends on what happens in the economy and what we think will happen to the rate of inflation over the next few years.
We have raised interest rates to help inflation return to our 2% target
We expect inflation to fall next year, and be close to our 2% target in around two years
We expect inflation to begin to fall next year.
That’s because we don’t expect the causes of the current high rate of inflation to persist.
It’s unlikely that the prices of energy and imported goods will continue to rise as rapidly as they have done recently.
We also don’t think that the demand for goods will continue to rise as fast, and we expect that some of the production difficulties businesses are facing will ease.
We expect inflation will be close to our target in around two years.
We expect inflation to rise further and then fall back
Monetary Policy Summary
The MPC sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 4 May 2022, the MPC voted by a majority of 6-3 to increase Bank Rate by 0.25 percentage points, to 1%. Those members in the minority preferred to increase Bank Rate by 0.5 percentage points, to 1.25%.
Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine. This has led to a material deterioration in the outlook for world and UK growth. These developments have exacerbated greatly the combination of adverse supply shocks that the United Kingdom and other countries continue to face. Concerns about further supply chain disruption have also risen, both due to Russia’s invasion of Ukraine and to Covid-19 developments in China.
UK GDP is estimated to have risen by 0.9% in 2022 Q1, stronger than expected in the February Monetary Policy Report. The unemployment rate fell to 3.8% in the three months to February, and is likely to fall slightly further in coming months, consistent with a continuing tightening in the labour market and with a margin of excess demand at present. Surveys of business activity have generally remained strong. There have, however, been signs from indicators of retail spending and consumer confidence that the squeeze on real disposable incomes is starting to weigh on the household sector. The level of GDP is expected to be broadly unchanged in Q2.
Twelve-month CPI inflation rose to 7.0% in March, around 1 percentage point higher than expected in the February Report. The strength of inflation relative to the 2% target mainly reflects previous large increases in global energy and tradable goods prices, the latter of which is due to the shift in global demand towards durable goods and to supply chain disruptions.
The Committee’s updated central projections for activity and inflation are set out in the accompanying May Monetary Policy Report. The projections are conditioned on a market-implied path for Bank Rate that rises to around 2½% by mid-2023, before falling to 2% at the end of the forecast period. Fiscal policy is assumed to evolve in line with announced Government policies. Wholesale energy prices are assumed to follow their respective futures curves for the first six months of the projections and remain constant beyond that, in contrast to futures curves, which are downward sloping over coming years. There are material risks around this assumption.
In the May Report central projection, CPI inflation is expected to rise further over the remainder of the year, to just over 9% in 2022 Q2 and averaging slightly over 10% at its peak in 2022 Q4. The majority of that further increase reflects higher household energy prices following the large rise in the Ofgem price cap in April and projected additional large increase in October. The price cap mechanism means that it takes some time for increases in wholesale gas and electricity prices, and their respective futures curves, to be reflected in retail energy prices. Given the operation of the price cap, consumer price inflation is likely to peak later in the United Kingdom than in many other economies, and may therefore fall back later. The expected rise in CPI inflation also reflects higher food, core goods and services prices.
Underlying nominal earnings growth has risen by more than projected in the February Report and is expected to strengthen in coming months, given the further tightening of the labour market and some upward pressure from higher price inflation. Companies generally expect to increase their selling prices strongly in the near term, following the sharp rises in their costs, with many reporting confidence that they will be able to rebuild at least some of their margins.
Nonetheless, in the May Report central projection, UK GDP growth is expected to slow sharply over the first half of the forecast period. That predominantly reflects the significant adverse impact of the sharp rises in global energy and tradable goods prices on most UK households’ real incomes and many UK companies’ profit margins. Although the unemployment rate is likely to fall slightly further in the near term, it is expected to rise to 5½% in three years’ time given the sharp slowdown in demand growth. Excess supply builds to 2¼% by the end of the forecast period.
With monetary policy acting to ensure that longer-term inflation expectations are anchored at the 2% target, upward pressure on CPI inflation is expected to dissipate over time. Global commodity prices are assumed to rise no further in the central projection, global bottlenecks ease over time, and the weakening in demand growth and building excess supply lead domestic inflationary pressures to subside.
Conditioned on the rising market-implied path for Bank Rate and the MPC’s current forecasting convention for future energy prices, CPI inflation is projected to fall to a little above the 2% target in two years’ time, largely reflecting the waning influence of external factors, and to 1.3% in three years, well below the target and mainly reflecting weaker domestic pressures. The risks to the inflation projection are judged to be skewed to the upside at these points, given the risks of more persistent strength in nominal wage growth and domestic price setting than assumed.
The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework also recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. The economy has recently been subject to a succession of very large shocks. Russia’s invasion of Ukraine is another such shock. In particular, should recent movements prove persistent as the central projections assume, the very elevated levels of global energy and tradable goods prices, of which the United Kingdom is a net importer, will necessarily weigh further on most UK households’ real incomes and many UK companies’ profit margins. This is something monetary policy is unable to prevent. The role of monetary policy is to ensure that, as this real economic adjustment occurs, it does so in a manner consistent with achieving the 2% inflation target sustainably in the medium term, while minimising undesirable volatility in output.
Recent developments have exacerbated materially both the near-term peak in CPI inflation, and the prospective negative impact on activity and medium-term inflationary pressures. Nevertheless, given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist, the Committee voted to increase Bank Rate by 0.25 percentage points at this meeting.
Based on their updated assessment of the economic outlook, most members of the Committee judge that some degree of further tightening in monetary policy may still be appropriate in the coming months. There are risks on both sides of that judgement and a range of views among these members on the balance of risks. The MPC will continue to review developments in the light of incoming data and their implications for medium-term inflation.
The Committee reaffirms its preference in most circumstances to use Bank Rate as its active policy tool when adjusting the stance of monetary policy. As Bank Rate is now being increased to 1%, and consistent with the MPC’s previous guidance, the Committee will consider beginning the process of selling UK government bonds held in the Asset Purchase Facility. The Committee reaffirms that the decision to commence sales will depend on economic circumstances including market conditions at the time, and that sales would be expected to be conducted in a gradual and predictable manner so as not to disrupt the functioning of financial markets. The Committee recognises the benefits of providing market participants with clarity on the framework for any potential sales programme. The Committee has therefore asked Bank staff to work on a strategy for UK government bond sales, and will provide an update at its August meeting. This will allow the Committee to make a decision at a subsequent meeting on whether to commence sales.
1: The economic outlook
Since the February Report, global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine. This has led to a material deterioration in the outlook for world and UK growth. These developments have exacerbated greatly the combination of adverse supply shocks that the UK and other countries continue to face. They accentuate the extent to which UK CPI inflation is well above the 2% target over the first two years of the MPC’s central projection and well below the target in the third year.
Inflation has risen further in many countries. In the UK, CPI inflation rose to 7% in March, mainly due to the large increases in global energy and tradable goods prices. The latter is due to supply chain disruption and the shift in global demand towards durable goods, both relating to the pandemic.
CPI inflation is expected to peak at slightly over 10% in 2022 Q4, which would be the highest rate since 1982. The significant majority of that further increase reflects: higher household energy prices following the large rise in the Ofgem price cap in April and projected further large increase in October when the cap is next reset; and, to a lesser extent, higher food and goods prices following the war in Ukraine. As was the case in the March data, goods and energy prices are projected to account for four fifths of the overshoot in CPI inflation, relative to target, at the peak. The price cap mechanism means that it takes some time for changes in wholesale gas and electricity prices, and their respective futures curves, to be reflected in UK retail utility prices. Given the operation of the price cap, consumer price inflation is likely to peak later in the UK than in many other countries, and may therefore fall back later.
Though responsible for much less of the rise in headline inflation, domestic inflationary pressures have also increased. Underlying nominal wage growth has risen to above pre-Covid rates and is expected to strengthen in the next few months, given the further tightening of the labour market and some upward pressure from higher price inflation, as firms seek to retain and recruit staff. Consistent with this, there has been some increase in inflation in the prices of more domestically supplied services.
Firms generally expect to increase their selling prices strongly, following the sharp rises in their costs, with many confident that they will be able to rebuild at least some of their margins. This is in contrast to the recent deterioration in consumer sentiment.
In line with the MPC’s conventions, the forecast is conditioned on: wholesale energy prices following their futures curves for the next six months and then remaining constant; announced government policy including the Ofgem price cap; and the path of Bank Rate implied by financial markets, which rises to just over 2.5% by mid-2023, 1.1 percentage points higher than in February, before falling to 2.0% by the end of the projection.
There is considerable uncertainty around the MPC’s projections. UK GDP growth slows sharply over the first half of the forecast. That predominantly reflects the significant adverse impact of the sharp rises in global commodity and tradable goods prices on many UK companies' profit margins and most UK households’ real incomes – total real household disposable income is projected to fall in 2022 by the second largest amount since records began in 1964 before picking up thereafter. GDP is expected to contract in 2022 Q4, in part reflecting the projected large rise in household energy prices in October. Although unemployment is expected to decline further in the near term, it rises to 5½% by the end of the projection given the sharp slowdown in demand growth and excess supply builds to 2¼%.
After the peak in 2022 Q4, the upward pressure on CPI inflation is expected to dissipate rapidly, as global commodity prices are assumed to rise no further, global bottlenecks ease, and domestic inflationary pressures subside in response to weaker growth of demand and a rising degree of excess supply. CPI inflation is projected to fall to just above the 2% target in two years’ time, largely reflecting the waning influence of external factors, and to 1.3% in three years, well below the target, reflecting weaker domestic pressures. The risks to the inflation projection are judged to be skewed to the upside at these points, given the risks of more persistent strength in wage growth and domestic price-setting than assumed.
In projections conditioned on the alternative assumption of constant interest rates at 1%, activity is projected to be materially stronger than in the MPC’s forecasts conditioned on market rates. As a result, unemployment remains close to its current rate over the forecast period, instead of rising by around 1½ percentage points. CPI inflation is forecast to be significantly higher, with inflation projected to be 2.9% and 2.2% in two years and three years’ time respectively.
1.1: The MPC’s projections
Table 1.A: Forecast summary (a) (b)
2022 Q2 | 2023 Q2 | 2024 Q2 | 2025 Q2 | |
|---|---|---|---|---|
GDP (c) | 3.2 (3.2) | 0.0 (1.2) | 0.2 (1.0) | 0.7 |
CPI inflation (d) | 9.1 (7.0) | 6.6 (3.5) | 2.1 (1.9) | 1.3 |
LFS unemployment rate | 3.6 (3.9) | 3.9 (4.4) | 4.6 (4.7) | 5.5 |
Excess supply/Excess demand (e) | +½ (0) | -1¼ (-½) | -1¾ (-½) | -2¼ |
Bank Rate (f) | 1.0 (0.7) | 2.5 (1.4) | 2.4 (1.4) | 2.0 |
Footnotes
- (a) Modal projections for GDP, CPI inflation, LFS unemployment and excess supply/excess demand. Figures in parentheses show the corresponding projections in the February 2022 Monetary Policy Report.
- (b) Unless otherwise stated, the projections shown in this section are conditioned on: Bank Rate following a path implied by market yields; the Term Funding Scheme and Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises; the Recommendations of the Financial Policy Committee and the current regulatory plans of the Prudential Regulation Authority; the Office for Budget Responsibility’s assessment of the Government’s tax and spending plans as set out in the Spring Statement 2022; commodity prices following market paths for six months, then held flat; the sterling exchange rate remaining broadly flat; and the prevailing prices of a broad range of other assets, which embody market expectations of the future stocks of purchased gilts and corporate bonds. The main assumptions are set out in the ‘Download the chart slides and data’ link at Monetary Policy Report – May 2022.
- (c) Four-quarter growth in real GDP. The growth rates reported in the table exclude the backcast for GDP. Including the backcast 2022 Q2 growth is 3.2%, 2023 Q2 growth is 0.0%, 2024 Q2 growth is 0.2% and 2025 Q2 growth is 0.7%.
- (d) Four-quarter inflation rate.
- (e) Per cent of potential GDP. A negative figure implies output is below potential and a positive that it is above.
- (f) Per cent. The path for Bank Rate implied by forward market interest rates. The curves are based on overnight index swap rates.
The conditioning assumptions underlying the MPC’s projections
In line with the Committee’s conventions, the projections are conditioned on a number of technical assumptions.
The forecast is conditioned on the paths for policy rates implied by financial markets. Since the February Report, interest rates have increased materially in a number of advanced economies (Chart 2.6). In the UK, the market-implied path for Bank Rate, as captured in the 15-day average of forward interest rates to 26 April, was consistent with Bank Rate reaching just over 2.5% in mid-2023, 1.1 percentage points higher than in February, before falling back to 2.0% by the end of the projection (Table 1.A). The path for Bank Rate implied by financial markets is higher than that expected by respondents to the Bank’s latest Market Participants Survey. Longer‑term interest rates have also increased sharply since February (Section 2.1).
Fiscal policy is assumed to evolve in line with announced government policies. Bank staff estimate that the measures contained in the Spring Statement will raise the level of GDP by a peak of ½% over the forecast period (Section 2.2). Fiscal policy as a whole tightens over the projection.
The forecast is conditioned on wholesale energy prices following their respective futures curves for the first six months of the projection and then remaining constant, and announced government policy including the Ofgem price cap (see Box A of the November 2021 Report). Energy prices have been highly volatile recently, and have risen further since February. They are significantly higher than pre-pandemic averages and a year ago. Based on the 15-day average to 26 April, sterling oil prices were 65% above their 2021 Q2 level, and UK wholesale gas prices almost three times higher. Higher gas prices have also led to a sharp pickup in wholesale electricity prices, which have risen by around 125% over this period. Although UK spot gas prices have fallen in recent weeks (Section 3), energy futures curves are much higher over the next year than in February reflecting the impact of the war in Ukraine. Based on these assumptions and the UK energy regulator Ofgem’s published method for calculating the retail gas and electricity price caps, Bank staff currently forecast that household energy prices will rise by around 40% in October following the 54% increase in April.
As with energy prices, the MPC’s projections are conditioned on non-energy commodity prices following their respective futures curves for the first six months and beyond that remaining constant. A wide range of non-energy commodity prices and their respective futures curves, for example agricultural commodities and metals, have also risen sharply since the invasion of Ukraine.
The global outlook
Global inflationary pressures are forecast to build further in the near term, before falling back sharply.
Global inflationary pressures have intensified sharply following the invasion of Ukraine. This largely reflects the further sharp increases in energy and other commodity prices. It also reflects the impact of continued and more widespread disruption to global supply chains on tradable goods prices, including the restrictions in China to contain outbreaks of Covid. In addition, the shift in global demand towards durable goods and away from services, particularly in the US (see Box B in the February Report), continues to put significant upward pressure on tradable goods prices. Bank staff estimate that on a UK-weighted basis, four-quarter world export price inflation, including energy, rose to 15% in 2022 Q1, and world export prices are expected to rise further in the near term. This is putting substantial upward pressure on consumer price inflation in many countries.
Four-quarter world export price inflation is then forecast to fall sharply and turn negative in mid-2023. The sharp fall largely reflects the assumption that global commodity prices remain constant beyond six months. Further out, it reflects the Committee’s expectations that supply chain disruption will start to ease at the end of this year and demand, particularly in the US, will shift away from durable goods to services. Both of these factors will put downward pressure on tradable goods prices, though they are expected to remain well above their pre-pandemic levels at the end of the forecast period. The projected fall in energy and other commodity prices and easing in global bottlenecks are the main reasons why global consumer price inflation falls back materially beyond the near term.
The outlook for world activity has deteriorated materially following the invasion of Ukraine.
The war in Ukraine is adversely affecting world activity through a number of channels. The most significant of these are the sharp increases in energy and other commodity prices and the continued and more widespread supply chain disruption pushing up tradable goods prices. As a result, in the MPC’s projections, annual UK-weighted world GDP growth is projected to slow from 5¼% in 2021 to 2½% in 2022 and 2% in 2024 (Table 1.C), which weighs on UK demand.
UK GDP growth
UK GDP growth slows sharply over the first half of the forecast period.
Bank staff estimate that quarterly UK GDP growth was 0.9% in 2022 Q1. Growth slows sharply over the first half of the projection (Chart 1.1), reflecting the significant adverse impact of higher global commodity and tradable goods prices on UK demand. GDP is projected to fall in 2022 Q4 (Chart 1.2), driven largely by the decline in households’ real incomes, including that stemming from the projected rise of around 40% in retail gas and electricity prices when the Ofgem price caps are next reset in October. Calendar year GDP growth is broadly flat in 2023. Four-quarter GDP growth picks up to around ¾% by the end of the projection as the pressures on household incomes ease somewhat, although this is below pre-pandemic rates.
Chart 1.1: GDP growth projection based on market interest rate expectations, other policy measures as announced
Footnotes
- The fan charts depict the probability of various outcomes for GDP growth (in Chart 1.1) and GDP (in Chart 1.2). They have been conditioned on the assumptions in Table 1.A footnote (b). To the left of the shaded area, the distribution reflects uncertainty around revisions to the data over the past. To aid comparability with the official data, it does not include the backcast for expected revisions, which is available from the ‘Download the chart slides and data’ link at Monetary Policy Report – May 2022. To the right of the shaded area, the distribution reflects uncertainty over the evolution of GDP growth (in Chart 1.1) and GDP (in Chart 1.2) in the future. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that the mature estimate of GDP growth (in Chart 1.1) or GDP (in Chart 1.2) would lie within the darkest central band on only 30 of those occasions. The fan chart is constructed so that outturns are also expected to lie within each pair of the lighter aqua areas on 30 occasions. In any particular quarter of the forecast period, GDP growth or GDP is therefore expected to lie somewhere within the fan on 90 out of 100 occasions. And on the remaining 10 out of 100 occasions GDP growth or GDP can fall anywhere outside the aqua area of the fan chart. Over the forecast period, this has been depicted by the light grey background. See the box on page 39 of the November 2007 Inflation Report for a fuller description of the fan chart and what it represents.
Chart 1.2: GDP projection based on market interest rate expectations, other policy measures as announced
Footnotes
- See footnote for Chart 1.1.
In projections conditioned on the alternative assumption of constant interest rates at 1%,footnote [1] GDP growth is materially stronger than in the MPC’s forecasts conditioned on market rates (Chart 1.3).
Chart 1.3: GDP projection based on constant interest rates at 1%, other policy measures as announced
Footnotes
- This fan chart depicts the probability of various outcomes for GDP, conditioned on the assumptions in Table 1.A footnote (b), apart from for Bank Rate, with this chart conditioned on constant interest rates at 1%. The fan chart has the same interpretation as Chart 1.1.
Demand growth slows sharply over the projection.
The prices of global energy, other commodity and tradable goods have risen sharply. The UK is a net importer of these, so overall, and under the assumption that global energy and commodity prices remain constant beyond six months, this will lower most UK households’ real incomes and many UK companies’ profit margins.
Total real household disposable income is projected to fall by 1¾% in 2022 (Table 1.C), despite the support from the fiscal measures contained in the Spring Statement (Section 2.2). This is a greater fall than in the February projection, and apart from in 2011 would be the largest contraction since records began in 1964. Household income picks up over the rest of the forecast.
As a result of the real income squeeze, four-quarter consumption growth slows materially over the first half of the forecast. However, it slows by much less than income growth and is positive throughout the projection as, consistent with the latest Bank/NMG survey (Section 3), households are assumed to respond in part to the real income squeeze by saving less. That is supported by consumers running down the stock of savings they accumulated, in aggregate, during the pandemic. In the central projection, the household saving rate is forecast to decline from 6½% in 2021 Q4 to 3½% in 2022 Q4, which would be the lowest level since 1999, before it rises to 6¾% by the end of the projection.
Business investment picks up over the next year and then falls back in the second half of the forecast period, as some spending is brought forward in response to the Government’s capital allowance super-deduction. Some contacts of the Bank’s Agents have reported that their capital spending remains below their relatively strong investment intentions as global bottlenecks continue to limit supplies of some capital goods (Box C).
The fall in UK demand growth over the projection also reflects the slowing in the world economy and the tightening in fiscal and monetary policy as both evolve in line with their conditioning assumptions.
Supply growth also slows, to around 1% at the end of the forecast period.
Supply disruptions for a wide range of inputs to production and certain tradable goods, both accentuated by the invasion of Ukraine (Box B), and continued recruitment difficulties, contribute to a slowing in supply growth in 2022. Supply growth is projected to be around 1% at the end of the projection, a little below the rates seen before Covid.
Excess supply/demand
The Committee judges that there is a margin of excess demand at present…
Most indicators suggest that there is currently a margin of excess demand across the economy as a whole. The labour market has tightened further, with the unemployment rate at 3.8% in February having fallen below the MPC’s assessment of the medium-term equilibrium rate of unemployment of just above 4%. Firms continue to report significant recruitment difficulties and elevated levels of vacancies and most surveys suggest above-average levels of capacity utilisation.
…but excess supply is projected to emerge later this year and build over the forecast period.
Unemployment is expected to fall further in the near term, reflecting the recent strength of activity and business optimism. However, the projected sharp slowing in demand growth means that the MPC expects demand to grow more slowly than supply over the projection. As a result, unemployment is expected to start to rise in 2022 Q4 (Chart 1.4) when a margin of excess supply emerges. The degree of excess supply is expected to rise to around 2¼%, and the rate of unemployment to 5½%, by the end of the forecast period (Table 1.A).
Chart 1.4: Unemployment projection based on market interest rate expectations, other policy measures as announced
Footnotes
- The fan chart depicts the probability of various outcomes for LFS unemployment. It has been conditioned on the assumptions in Table 1.A footnote (b). The coloured bands have the same interpretation as in Charts 1.1 and 1.2, and portray 90% of the probability distribution. The calibration of this fan chart takes account of the likely path dependency of the economy, where, for example, it is judged that shocks to unemployment in one quarter will continue to have some effect on unemployment in successive quarters. The fan begins in 2022 Q1, a quarter earlier than for CPI inflation. That is because Q1 is a staff projection for the unemployment rate, based in part on data for January and February. The unemployment rate was 3.8% in the three months to February, and is projected to be 3.8% in Q1 as a whole. A significant proportion of this distribution lies below Bank staff’s current estimate of the long-term equilibrium unemployment rate. There is therefore uncertainty about the precise calibration of this fan chart.
In projections conditioned on the alternative assumption of constant interest rates at 1%, unemployment remains close to its current rate over the forecast period, instead of rising by around 1½ percentage points, as in the MPC’s forecast conditional on market rates (Chart 1.5).
Chart 1.5: Unemployment projection based on constant interest rates at 1%, other policy measures as announced
Footnotes
- The fan chart depicts the probability of various outcomes for LFS unemployment. It has been conditioned on the assumptions in Table 1.A footnote (b), apart from for Bank Rate, with this chart conditioned on constant interest rates at 1%. The coloured bands have the same interpretation as in Charts 1.1 and 1.2, and portray 90% of the probability distribution. The calibration of this fan chart takes account of the likely path dependency of the economy, where, for example, it is judged that shocks to unemployment in one quarter will continue to have some effect on unemployment in successive quarters. The fan begins in 2022 Q1, a quarter earlier than for CPI inflation. That is because Q1 is a staff projection for the unemployment rate, based in part on data for January and February. The unemployment rate was 3.8% in the three months to February, and is projected to be 3.8% in Q1 as a whole. A significant proportion of this distribution lies below Bank staff’s current estimate of the long-term equilibrium unemployment rate. There is therefore uncertainty about the precise calibration of this fan chart.
CPI inflation
The rise in CPI inflation over the past year predominantly reflects external factors. Domestic inflationary pressures have also strengthened.
CPI inflation rose to 7% in March. The vast majority of the increase in inflation over the past year and four fifths of the overshoot relative to the 2% target reflects the impact of the sharp increases in global energy and tradable goods prices (Section 2.3).
Domestic inflationary pressures have also risen somewhat, with services price inflation having picked up to its highest rate since November 2012. That is likely to reflect, in part, the rise in Bank staff’s estimates of underlying wage growth to around 4%, above pre-pandemic rates (Section 2.3). That, in turn, reflects the tightening in the labour market and upward pressure from the rise in CPI inflation, as firms seek to retain and recruit staff, consistent with the Agents’ pay survey set out in the February Report and the latest reports from their contacts.
Reflecting similar factors, CPI inflation is expected to rise further to a peak of slightly over 10% in 2022 Q4.
CPI inflation is expected to rise further to a peak of slightly above 10%, on average, in 2022 Q4 (Chart 1.6). The significant majority of that expected increase reflects: the rise of 54% in household energy prices in April and the projected increase of around 40% when the Ofgem price is next reset in October; and, to a lesser extent, higher food and goods prices, given the sharp rises in global agricultural commodity and energy prices and renewed supply chain disruption following the invasion of Ukraine. As was the case in the March data, goods and energy prices are projected to account for four fifths of the overshoot in CPI inflation, relative to target, at the peak when the contribution of energy prices to CPI inflation is expected to rise to 4 percentage points (Chart 1.7). The price cap mechanism means that it takes some time for changes in wholesale gas and electricity prices, and their respective futures curves, to be reflected in UK retail utility prices. Given the operation of the price cap, consumer price inflation is likely to peak later in the UK than in many other countries, and may therefore fall back later.
Chart 1.6: CPI inflation projection based on market interest rate expectations, other policy measures as announced
Footnotes
- The fan chart depicts the probability of various outcomes for CPI inflation in the future. It has been conditioned on the assumptions in Table 1.A footnote (b). If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that inflation in any particular quarter would lie within the darkest central band on only 30 of those occasions. The fan chart is constructed so that outturns of inflation are also expected to lie within each pair of the lighter orange areas on 30 occasions. In any particular quarter of the forecast period, inflation is therefore expected to lie somewhere within the fans on 90 out of 100 occasions. And on the remaining 10 out of 100 occasions inflation can fall anywhere outside the orange area of the fan chart. Over the forecast period, this has been depicted by the light grey background. See the box on pages 48–49 of the May 2002 Inflation Report for a fuller description of the fan chart and what it represents.
Domestic price pressures are also expected to rise further. Underlying wage growth is projected to pick up further in the next few months. That reflects the tightening in the labour market and further upward pressure from the rise in CPI inflation, as firms seek to retain and recruit staff. And, as suggested by the Agents’ survey on pricing and margins (Section 3), firms seek to rebuild their margins following the sharp increases in their costs. As a result, services price inflation is expected to rise a little further over this period. Whole-economy average weekly earnings (AWE) growth is expected to be slightly lower than underlying wage growth during 2022, given an expected drag from compositional effects.
As external and domestic pressures subside, CPI inflation is projected to fall back to around the 2% target in two years’ time, and well below the target in three years.
Based on the conditioning assumptions set out above, after the expected peak in 2022 Q4, CPI inflation falls back rapidly to 2.1% in two years’ time and 1.3% in three years (Chart 1.6). The fall in inflation over the first two years of the projection to close to the 2% target predominantly reflects the contribution of energy prices fading to zero by the start of 2024 (Chart 1.7), as prices are assumed to stabilise (albeit at historically high levels) and much lower goods price inflation, as global bottlenecks ease. Domestic inflationary pressures also lessen as the slowdown in demand and the resultant increases in unemployment and excess supply moderate wage growth and firms’ ability to rebuild their margins. As a result, CPI inflation falls to well below the target in the third year of the forecast.
Chart 1.7: CPI inflation and CPI inflation excluding energy (a)
In projections conditioned on the alternative assumption of constant interest rates at 1%, CPI inflation is projected to be 2.9% and 2.2% in two years and three years’ time respectively, significantly higher than in the Committee’s forecast conditioned on market rates (Chart 1.8).
Chart 1.8: CPI inflation projection based on constant interest rates at 1%, other policy measures as announced
Footnotes
- This fan chart depicts the probability of various outcomes for CPI inflation in the future, conditioned on the assumptions in Table 1.A footnote (b), apart from for Bank Rate, with this chart conditioned on constant interest rates at 1%. The fan chart has the same interpretation as Chart 1.6.
Comparison with the February Report projections
UK GDP is materially lower than in February over most of the forecast period.
The level of UK GDP is expected to be 2% lower than in February by the end of the forecast period. That largely reflects the adverse impact on UK and world activity of the further sharp increases in global energy, other commodity and tradable goods prices, and to a lesser extent, the impact of the higher market path for Bank Rate.
Although unemployment is lower in the near term, the weaker outlook for demand means that it is higher at the end of the projection than forecast in February.
Reflecting recent stronger-than-expected GDP growth, unemployment has again fallen and the labour market tightened by more than expected since the previous Report. Given that and intelligence from the Bank’s Agents, the MPC judges that unemployment will fall a little further and start to rise a little later than assumed in February. Unemployment then rises more sharply, reflecting the weaker outlook for demand. As a result, the unemployment rate is around ½% higher at the end of the projection. The Committee has also revised down its projection for labour participation following the fall during the pandemic. The higher level of unemployment and lower path for labour participation mean that excess supply builds to 2¼% by the end of the projection, 1¼ percentage points more than in February.
The projection for CPI inflation is materially stronger than in February over the first two years of the forecast period, but slightly lower in the third year.
The further recent rises in energy and other commodity prices and their respective futures curves account for most of the significant upward revision to the projection for CPI inflation over the first 18 months of the forecast period.
The MPC’s projections are also based on an assumption that supply chain disruption will persist for longer, following the invasion of Ukraine, and the restrictions in China to contain outbreaks of Covid. This puts more upward pressure on global tradable goods prices in the near term than in February and pushes up further on CPI inflation over the next year.
The projection for underlying wage growth in the near term is around ½ percentage point stronger than in February. That reflects a judgement that many firms will grant larger pay awards to retain and recruit staff given the tightening in the labour market and the sharper rise in inflation than previously assumed (Box C).
As a result of these factors, the projection for CPI inflation is materially higher than in February over the first two years of the forecast period, and lower in the third year.
1.2: Key judgements and risks
Key judgement 1: persistently higher global commodity prices and tradable goods prices from supply chain constraints, both accentuated by the invasion of Ukraine, lead to a sharp slowdown in world activity and push global consumer price inflation up further before their effects eventually dissipate.
As set out above, the MPC’s forecasts are conditioned on paths for energy and other commodity prices, which follow their respective futures curves for the first six months of the projection, and then remain constant. These futures curves generally fall beyond 2022 so this assumption implies paths for commodity prices that are significantly above the futures curves.
There are significant risks around these paths. These depend to a significant extent on how the war in Ukraine evolves. One upside risk is that the disruption to the supply of commodities is greater than assumed. Another is an even greater escalation of geopolitical tensions, which would likely be associated with higher general uncertainty about the economic outlook. There are downside risks to the paths for commodity prices if these tensions are resolved more quickly or it is easier to substitute away from the affected commodities than assumed. Higher commodity prices would further restrain growth in global activity and put more upward pressure on consumer price inflation over the next year or so, and vice versa if commodity prices are lower.
There are also downside risks to the assumed paths for energy and other commodity prices if prices fall back to the levels implied by futures curves. In the case of energy prices, the level of GDP would be nearly 1% higher by the end of the forecast period and excess supply and unemployment around ¾ percentage points lower. CPI inflation would fall back towards the target more rapidly than in the central projection and would be around ½ and over 1 percentage points below the target in two and three years’ time respectively (Table 1.B).
Table 1.B: GDP growth, excess supply/demand and CPI inflation in the MPC’s central projection and in the alternative scenario in which energy prices follow their futures curves throughout the forecast period (a)
Per cent | 2022 Q2 | 2023 Q2 | 2024 Q2 | 2025 Q2 |
|---|---|---|---|---|
Central projection | ||||
GDP | 3.2 | 0 | 0.2 | 0.7 |
Excess supply/Excess demand | ½ | -1¼ | -1¾ | -2¼ |
CPI inflation | 9.1 | 6.6 | 2.1 | 1.3 |
Alternative scenario | ||||
GDP | 3.2 | 0.3 | 0.6 | 0.9 |
Excess supply/Excess demand | ½ | -1 | -1¼ | -1½ |
CPI inflation | 9.1 | 6.0 | 1.4 | 0.7 |
Footnotes
In the MPC’s central projection, world export prices rise a little further in the near term, partly reflecting upward pressure from global bottlenecks. World export prices then fall back a little as these effects fade, though prices remain well above their pre-pandemic levels at the end of the forecast period. There are similar risks around this judgement.
In the near term, global bottlenecks could persist for longer if the war in Ukraine and the restrictions in China to contain outbreaks of Covid lead to larger and more persistent adverse effects on global supply chains than assumed. This would depress global GDP growth further and put more upward pressure on world export and consumer price inflation over the next year.
If global bottlenecks ease by more or earlier than expected, for example if supply chain disruption eases or global demand shifts from durable goods towards services to a greater extent than assumed, global goods prices could fall closer to their pre-pandemic levels over the forecast period. This would put more downward pressure on world export and consumer price inflation and give greater support to world activity than assumed.
Key judgement 2: the labour market tightens further in the near term before the slowdown in demand leads to a rise in unemployment and excess supply over the rest of the projection.
The labour market has tightened by more than the MPC expected over the past year. Although the Committee has made a judgement that unemployment is now expected to fall a little further and start to rise a little later, there is still a risk that labour demand is stronger and the labour market remains tighter for longer than assumed, given the strength of business optimism.
Recruitment difficulties remain acute with the number of vacancies having risen to a record high. There is a risk that this reflects some frictions in the matching of workers and jobs and has been accompanied by a rise in the medium-term equilibrium rate of unemployment, which would put further upward pressure on wage growth.
The labour market could also be tighter than assumed if more of the fall in labour participation since the start of the pandemic reflects people leaving the labour market permanently. On the other hand, some of those who have recently left the labour market may return to work to support their income and spending in the face of the real income squeeze.
Unemployment would be higher, the labour market looser and excess supply greater than expected if the downside risks to the demand outlook set out in Key judgement 3 below materialised, and vice versa if the upside risks crystallised.
Key judgement 3: demand growth in the UK slows sharply over the first half of the projection, predominantly reflecting the adverse impact of higher global commodity and tradable goods prices.
As set out in Section 1.1, household consumption growth slows sharply over the first half of the projection, but by less than household real income growth as the saving rate falls back over the next year before income growth and the saving rate pick up later.
Demand growth could slow by more than expected if households cut back their spending by more than assumed in the face of the squeeze in their real incomes. In aggregate, households accumulated significant additional savings during the pandemic, which should support their ability to smooth consumption temporarily as real incomes decline. In the central forecast, households are assumed to save less to meet the higher cost of living and the saving rate falls near to historically low levels at the end of 2022.
But the rise in savings during the pandemic has not occurred evenly – it is more marked among higher-income households – so not everyone may be in a position to do this. Energy and food bills form a larger share of lower-income households’ spending, so their ability to use savings to support their consumption may be limited (Section 3). In addition, and even for higher-income households, the associated deterioration in the economic outlook may increase households’ uncertainty about the future, leading them to increase their precautionary saving and lower their spending further. Higher uncertainty would also tend to lower capital spending by firms.
Consumer spending could be stronger than projected if the labour market is more resilient (Key judgement 2) and, therefore, households’ real income higher than expected. For example, this might encourage households to spend more of the additional savings they have accumulated, in aggregate, during the pandemic. Household spending could also be higher than expected if they believe that the rises in global commodity and tradable goods prices are likely to reverse quickly. If commodity prices fall by more than is assumed in the MPC’s central projections, demand growth would be stronger (Key judgement 1).
Overall, the risks to the MPC’s UK unemployment and GDP growth projections are judged to be balanced.
Key judgement 4: the vast majority of the increase and subsequent fall in CPI inflation reflects the impact of external factors. Domestic price pressures rise further this year, as wage growth strengthens and companies rebuild their margins. The increase in excess supply moderates these forces such that inflation is close to the 2% target in two years’ time and well below it in three years.
There are significant risks around the central projection for CPI inflation from both global factors, set out in Key judgement 1, and domestic inflationary pressures, set out here.
Risks to the projection for wage growth are to the upside over the next year or so, given acute recruitment difficulties and if firms grant larger pay awards than assumed in order to retain or recruit staff given the tightening in the labour market and the sharp rise in CPI inflation. Contacts of the Bank’s Agents report that so far 2022 pay settlements have been broadly in line with expectations from the Agents’ pay survey set out in the February Report. However, upside risks have increased with some firms reporting that they may need to make additional pay awards or bonuses later in the year to retain or recruit staff.
Firms may also be able to rebuild their margins by more than assumed over the projection. Around half of respondents to the Agents’ pricing and margins survey reported that they are finding it easier than usual to pass on their higher costs to prices (Section 3). Indicators of firms’ expectations for the increase in their selling prices are robust and have been revised up rapidly, and many point to upside risks to the central projection for CPI inflation in the near term.
Over the past few months, indicators of people’s short-term inflation expectations and measures of inflation expectations two to three years ahead have risen as inflation has picked up (Section 2.3). Longer-term inflation expectations measured from financial markets and household surveys have also increased in recent months, though by less than short-term measures, and are elevated by historic norms. Professional forecasters continue to expect CPI inflation to be close to target two and three years ahead. A risk to the inflation outlook is that longer-term inflation expectations evolve such that wage and price-setting are not consistent with inflation returning to the 2% target in the medium term. The Committee will continue to monitor measures of inflation expectations very closely and will continue to act to ensure that longer-term inflation expectations are well anchored around the 2% target.
Overall, the risks to the MPC’s inflation projection set out in Key judgements 1 and 4 are judged to be to be balanced in the first year of the forecast and skewed to the upside at the year 2 and 3 points, given the risks of more persistent strength in wage growth and domestic price-setting than assumed.
Table 1.C: Indicative projections consistent with the MPC’s forecast (a) (b)
Averages | Projections | ||||||
|---|---|---|---|---|---|---|---|
1998-2007 | 2010-2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |
World GDP (UK-weighted) (c) | 3 | 2½ | -4¼ | 5¼ | 2½ (3¼) | 2 (3) | 2 (2¼) |
World GDP (PPP-weighted) (d) | 4 | 3¾ | -3¼ | 6 | 3½ (4¼) | 3¼ (4) | 3½ (3½) |
Euro-area GDP (e) | 2¼ | 1½ | -6½ | 5¼ | 2¼ (3) | 1¼ (2½) | 1 (1½) |
US GDP (f) | 3 | 2¼ | -3½ | 5¾ | 3¼ (4) | 2¼ (2¾) | 2 (2) |
Emerging market GDP (PPP-weighted) (g) | 5½ | 5 | -2½ | 6½ | 4 (5) | 4½ (5) | 5 (4¾) |
of which, China GDP (h) | 10 | 7¾ | 2¼ | 8 | 4¾ (4¾) | 5½ (5¾) | 5¼ (5¼) |
UK GDP (i) | 3 | 2 | -9¼ | 7½ | 3¾ (3¾) | -¼ (1¼) | ¼ (1) |
Household consumption (j) | 3¼ | 2 | -10½ | 6¼ | 4¾ (5½) | 1 (1½) | 1 (1¼) |
Business investment (k) | 3 | 3¾ | -11¼ | -1 | 11 (13¾) | ½ (2) | -5¼ (-4¾) |
Housing investment (l) | 3¼ | 3¾ | -12½ | 14 | 7¼ (5½) | -1¾ (3¾) | -1½ (½) |
Exports (m) | 4½ | 3½ | -13 | -1¼ | 4¼ (3) | 3 (5¾) | 2½ (3¼) |
Imports (n) | 6¼ | 3¾ | -15¾ | 3¾ | 5½ (8¾) | 7¾ (7¾) | 2¼ (2) |
Contribution of net trade to GDP (o) | -½ | 0 | 1 | -1½ | -½ (-1¾) | -1½ (-¾) | 0 (¼) |
Real post-tax labour income (p) | 3¼ | 1½ | 2 | 1 | -3¼ (-2) | -¼ (-½) | 1¾ (¾) |
Real post-tax household disposable income (q) | 3 | 1½ | -¾ | 2 | -1¾ (-1¼) | 1 (¾) | 2½ (1½) |
Household saving ratio (r) | 7¼ | 7½ | 14 | 10½ | 4½ (4¾) | 4½ (4) | 5¾ (4¼) |
Credit spreads (s) | ¾ | 2½ | 2 | 1½ | 1 (1¼) | 1¼ (1½) | 1½ (1½) |
Excess Supply/Excess Demand (t) | 0 | -1¾ | -1¾ | -¼ | ¼ (0) | -1¼ (-½) | -1¾ (-¾) |
Hourly labour productivity (u) | 2½ | ¾ | 1½ | 1 | -¼ (-½) | ¼ (1) | 1 (1) |
Employment (v) | 1 | 1¼ | -2½ | 1 | ¾ (1) | -½ (¼) | -¼ (0) |
Average weekly hours worked (w) | 32¼ | 32 | 30¼ | 31½ | 31¾ (31¾) | 31¾ (31¾) | 31¾ (31¾) |
Unemployment rate (x) | 5¼ | 6 | 5¼ | 4 | 3½ (4) | 4¼ (4½) | 5 (5) |
Participation rate (y) | 63 | 63½ | 63½ | 63¼ | 63 (63½) | 63 (63½) | 62¾ (63½) |
CPI inflation (z) | 1½ | 2¼ | ½ | 5 | 10¼ (5¾) | 3½ (2½) | 1½ (1¾) |
UK import prices (aa) | -½ | 1¼ | 2¾ | 2¼ | 4¾ (1½) | -2¼ (-1) | -1¾ (-1) |
Energy prices - direct contribution to CPI inflation (ab) | ¼ | ¼ | -½ | 1½ | 4 (2) | ¼ (0) | 0 (0) |
Average weekly earnings (ac) | 4¼ | 2¼ | 4½ | 4½ | 5¾ (3¾) | 4¾ (3) | 2¾ (2¼) |
Unit labour costs (ad) | 2¾ | 1¼ | 11¾ | -2½ | 6¾ (2¾) | 4 (2) | 2 (1½) |
Private sector regular pay based unit wage costs (ae) | 1¾ | 1¾ | 9 | -2 | 4¾ (3) | 5 (2½) | 2¼ (1½) |
Footnotes
- Sources: Bank of England, Bloomberg Finance L.P., Department for Business, Energy and Industrial Strategy, Eurostat, IMF World Economic Outlook (WEO), National Bureau of Statistics of China, ONS, US Bureau of Economic Analysis and Bank calculations.
- (a) The profiles in this table should be viewed as broadly consistent with the MPC’s projections for GDP growth, CPI inflation and unemployment (as presented in the fan charts).
- (b) Figures show annual average growth rates unless otherwise stated. Figures in parentheses show the corresponding projections in the February 2022 Monetary Policy Report. Calculations for back data based on ONS data are shown using ONS series identifiers.
- (c) Chained-volume measure. Constructed using real GDP growth rates of 188 countries weighted according to their shares in UK exports.
- (d) Chained-volume measure. Constructed using real GDP growth rates of 189 countries weighted according to their shares in world GDP using the IMF’s purchasing power parity (PPP) weights.
- (e) Chained-volume measure. Forecast was finalised before the release of the preliminary flash estimate of euro-area GDP for Q1, so that has not been incorporated.
- (f) Chained-volume measure. Forecast was finalised before the release of the advance estimate of US GDP for Q1, so that has not been incorporated.
- (g) Chained-volume measure. Constructed using real GDP growth rates of 155 emerging market economy countries, as defined by the IMF WEO, weighted according to their relative shares in world GDP using the IMF’s PPP weights.
- (h) Chained-volume measure.
- (i) Excludes the backcast for GDP.
- (j) Chained-volume measure. Includes non-profit institutions serving households. Based on ABJR+HAYO.
- (k) Chained-volume measure. Based on GAN8.
- (l) Chained-volume measure. Whole-economy measure. Includes new dwellings, improvements and spending on services associated with the sale and purchase of property. Based on DFEG+L635+L637.
- (m) Chained-volume measure. The historical data exclude the impact of missing trader intra‑community (MTIC) fraud. Since 1998 based on IKBK-OFNN/(BOKH/BQKO). Prior to 1998 based on IKBK.
- (n) Chained-volume measure. The historical data exclude the impact of MTIC fraud. Since 1998 based on IKBL-OFNN/(BOKH/BQKO). Prior to 1998 based on IKBL.
- (o) Chained-volume measure. Exports less imports. GDP data based on the mode of the MPC’s GDP backcast.
- (p) Wages and salaries plus mixed income and general government benefits less income taxes and employees’ National Insurance contributions, deflated by the consumer expenditure deflator. Based on [ROYJ+ROYH-(RPHS+AIIV-CUCT)+GZVX]/[(ABJQ+HAYE)/(ABJR+HAYO)]. The backdata for this series is available via the ‘Download the chart slides and data’ link at Monetary Policy Report – May 2022.
- (q) Total available household resources, deflated by the consumer expenditure deflator. Based on [RPQK/((ABJQ+HAYE)/(ABJR+HAYO))].
- (r) Annual average. Percentage of total available household resources. Based on NRJS.
- (s) Level in Q4. Percentage point spread over reference rates. Based on a weighted average of household and corporate loan and deposit spreads over appropriate risk-free rates. Indexed to equal zero in 2007 Q3.
- (t) Annual average. Per cent of potential GDP. A negative figure implies output is below potential and a positive figure that it is above.
- (u) GDP per hour worked. GDP data based on the mode of the MPC's GDP backcast. Hours worked based on YBUS.
- (v) Four-quarter growth in LFS employment in Q4. Based on MGRZ.
- (w) Level in Q4. Average weekly hours worked, in main job and second job. Based on YBUS/MGRZ.
- (x) LFS unemployment rate in Q4. Based on MGSX.
- (y) Level in Q4. Percentage of the 16+ population. Based on MGWG.
- (z) Four-quarter inflation rate in Q4.
- (aa) Four-quarter inflation rate in Q4 excluding fuel and the impact of MTIC fraud.
- (ab) Contribution of fuels and lubricants and gas and electricity prices to four-quarter CPI inflation in Q4.
- (ac) Four-quarter growth in whole‑economy total pay in Q4. Growth rate since 2001 based on KAB9. Prior to 2001, growth rates are based on historical estimates of AWE, with ONS series identifier MD9M.
- (ad) Four-quarter growth in unit labour costs in Q4. Whole‑economy total labour costs divided by GDP at constant prices, based on the mode of the MPC’s GDP backcast. Total labour costs comprise compensation of employees and the labour share multiplied by mixed income.
- (ae) Four-quarter growth in private sector regular pay based unit wage costs in Q4. Private sector wage costs divided by private sector output at constant prices, based on the mode of the MPC’s GDP backcast. Private sector wage costs are average weekly earnings (excluding bonuses) multiplied by private sector employment.
Box A: Monetary policy since the February 2022 Report
At its meeting on 16 March 2022, the MPC voted by a majority of 8–1 to increase Bank Rate by 0.25 percentage points, to 0.75%.
The MPC noted that developments since the February Report were likely to accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes.
Regarding inflation, the invasion of Ukraine by Russia had led to further large increases in energy and other commodity prices including food prices. It was also likely to exacerbate global supply chain disruptions, and had increased the uncertainty around the economic outlook significantly. Global inflationary pressures would strengthen considerably further over coming months, while growth in economies that were net energy importers, including the United Kingdom, was likely to slow.
Turning to economic activity, UK GDP in January was stronger than expected in the February Report. Business confidence had held up and labour market activity data had remained robust. Consumer confidence had, however, fallen in response to the squeeze on real household disposable incomes. That impact on real aggregate income was likely to be materially larger than implied by the projections in the February Report, consistent with a weaker outlook for growth and employment, all else equal.
Twelve-month CPI inflation had risen from 5.4% in December to 5.5% in January, which triggered the exchange of open letters between the Governor and the Chancellor of the Exchequer, and was published alongside the monetary policy announcement. Inflation was expected to increase further in coming months, to around 8% in 2022 Q2, and perhaps even higher later this year. The projected overshoot of inflation relative to the 2% target to an increasing extent reflected global energy prices, with some further material contribution from tradable goods prices. Service price inflation had also picked up, although to a lesser extent than other components, with core services prices returning to their pre-Covid trend. Underlying nominal earnings growth was estimated to have remained above pre-pandemic rates, and was still expected to strengthen over the coming year.
If sustained, the latest rise in energy futures prices meant that Ofgem’s utility price caps could again be substantially higher when they are reset in October 2022. This could temporarily push CPI inflation around the end of this year above the level projected for April, which was previously expected to be the peak. Further out, inflation was expected to fall back materially, as energy prices stopped rising and as the squeeze on real incomes and demand put significant downward pressure on domestically generated inflation. That judgement also reflected that monetary policy would act to ensure that longer-term inflation expectations were well anchored around the 2% target.
Given the tightness of the labour market, continued signs of robust domestic cost and price pressures, and the risk that those pressures would persist, the Committee judged that an increase in Bank Rate of 0.25 percentage points was warranted.
2: Current economic conditions
Prior to the war, global GDP growth was slightly stronger than expected partly because Omicron weighed on activity by less than predicted. The build up to and subsequent Russian invasion of Ukraine has pushed up commodity prices further, lifted the outlook for global consumer price inflation, and led to a deterioration in the near-term outlook for global growth.
UK economic activity increased in January and February after its Omicron-related fall in December, and the labour market tightened further. Growth is expected to slow in Q2 however, owing to the further fall in real incomes and continuing supply chain disruption. The anticipated fall in Test and Trace spending and the Platinum Jubilee bank holiday are also expected to weigh on growth temporarily. Nevertheless, the unemployment rate is expected to fall further to 3.6% in Q2 as the number of vacancies remains historically high.
CPI inflation was 7% in March, in large part reflecting higher global energy and tradable goods prices. It is expected to rise to 9.1% in April, as the 54% increase in the Ofgem energy price cap takes effect. Inflation is expected to remain high beyond April, predominantly reflecting elevated goods prices due to continuing bottlenecks and the inflationary effects of Russia’s invasion of Ukraine on food and petrol prices, but also wage pressures feeding through to services prices. If energy futures prices remain elevated through the summer, inflation is likely to rise further when the Ofgem caps are reset in October, potentially to in excess of 10% towards the end of the year.
Chart 2.1: GDP growth is expected to slow in Q2, unemployment is projected to decline further, and inflation is expected to rise sharply
Footnotes
- Sources: ONS and Bank calculations.
- (a) The lighter diamonds show Bank staff’s projections at the time of the February 2022 Monetary Policy Report. The darker diamonds show Bank staff’s current projections. Projections for GDP and the unemployment rate are quarterly and show Q1 and Q2 (February projections show Q4 and Q1). Projections for CPI inflation are monthly and show April to June (February projections show January to March).
- (b) GDP and unemployment rate 2022 Q1 projections are based on official data to February. CPI inflation figure is an outturn.
2.1: Global developments and financial conditions
Prior to the invasion, global activity was growing a little faster than expected in the February Report…
UK‑weighted world GDP is expected to have grown by 0.3% in Q1 (Chart 2.2), slower than the 1% growth in the previous quarter, but slightly stronger than projected in the February Report. In Q1, the Omicron variant appears to have had a more benign impact on global activity than expected, as global activity and trade flows benefited from the need for fewer mitigation actions owing to more widespread vaccination compared to previous waves of the virus. Better-than-expected growth has been spread across advanced and emerging economies.
Chart 2.2: Global GDP growth is expected to slow materially in the first half of 2022
UK-weighted world GDP growth (a)
…labour markets in the UK’s main trading partners were tightening…
Labour markets have tightened in advanced economies. The US and euro-area unemployment rates fell to 3.6% and 6.8% in March and February respectively. The number of job vacancies increased across both the United States and European countries. As a result, the number of vacancies per person unemployed – a measure of labour market tightness – increased further to historically high levels.
…wage inflation was picking up in some advanced economies…
Indicators of wage growth rose in some advanced economies. In the US, the Federal Reserve Bank of Atlanta’s Wage Growth Tracker, which is less affected by compositional effects than headline measures, increased to a record high of 6% in March. In the euro area, wage growth has been moderate: negotiated wages grew by 1.6% in the year to 2021 Q4.
Chart 2.3: Inflation has picked up sharply in the US and euro area
Contributions to annual CPI inflation (a)
Footnotes
- Sources: Eurostat, Refinitiv Eikon from LSEG, US Bureau of Labor Statistics and Bank calculations.
- (a) Latest data to March 2022. Food includes non-alcoholic beverages, alcohol and tobacco. US energy includes fuel oil and other fuels, energy services and motor fuel. Euro-area energy includes electricity, gas, solid fuels and heat energy, liquid fuels and fuel and lubricants for personal transport equipment. Series may not sum to total due to rounding.
…and inflation had risen sharply.
As in the UK, inflation in the US and euro area has risen sharply. In March, euro-area HICP inflation rose to a record high of 7.4%. The large majority of the rise in euro-area inflation since early 2021 is accounted for by energy prices (Chart 2.3). The rise in US CPI inflation to 8.5% in March has been more broad-based. Energy prices have increased, but by less than in Europe owing to the smaller increase in US wholesale gas prices (Chart 2.4), reflecting the segmentation of the global gas market. Pressures on goods prices from bottlenecks have been particularly acute in the US, and services inflation has also increased as the labour market tightened. Headline PCE inflation in the US increased to 6.6% in March.
Chart 2.4: Wholesale gas prices have increased much more in Europe than the US
International wholesale gas prices (a)
The rise in inflation in advanced economies over the past year has been accompanied by a steady pickup in measures of medium-term inflation expectations derived from financial markets (Chart 2.5). These are now slightly above their 2010–19 average in the US, and somewhat further above their averages in the euro area and UK. The UK measures have been above their averages for some time.