How has the risk to inflation from inflation expectations evolved?

Quarterly Bulletin 2012 Q2
Published on 20 June 2012

By Rashmi Harimohan of the Bank’s Monetary Assessment and Strategy Division.

During 2011, the Monetary Policy Committee expressed concern that persistently above-target outturns of CPI inflation might lead to inflation expectations becoming less well anchored by monetary policy.  And in turn, that could make inflation itself more persistent via changes in price-setting or wage-setting behaviour.  But inflation is now more than 2 percentage points lower than in September 2011.  In light of that, this article discusses recent movements in inflation expectations and looks at a range of indicators to assess how the risk to inflation from expectations has evolved.  While the upside risk has receded a little relative to the 2010–11 H1 period, so long as inflation is above target, some risk remains.

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