By Becky Maule and Alice Pugh of the Bank’s Monetary Assessment and Strategy Division.
People’s expectations about future inflation play an important role in determining the current rate of inflation. There is a risk that the recent prolonged period of above-target inflation, which the Monetary Policy Committee (MPC) judges is more likely than not to continue over much of the next two years, may cause inflation expectations to become less well anchored. By pushing up wages and prices, higher inflation expectations could lead to inflation becoming more persistent. At the moment, most indicators are consistent with inflation expectations remaining anchored to the target, although there is tentative evidence that financial market measures of inflation expectations have become a little more responsive to developments in the economy. There are currently few signs to suggest that prices and wages have increased as a result of higher inflation expectations. The MPC will continue to monitor and assess indicators closely.