He believes the central bank hiked rates to the present stark level in order to prevent the aforementioned wage-price spiral, but he adds that while wages have increased, “the rises in the UK have just been playing catch-up to inflation, rather than driving inflation higher”.
Lyons says the BoE is setting rates based on current data, even though it is an established principle of monetary policy that there is a lag between rates increasing and the impact being felt in the economy.
Axa Investment Managers chief economist Gilles Moëc expects inflation will fall in undeveloped markets across the world later this year “mechanically” as the impacts of higher oil prices fall out of the data.
Fly in the ointment?
Although the official, or headline, rate of inflation has decreased in the UK, as in the rest of the developed world, core inflation and service-sector inflation have been slower to fall.
Service-sector inflation is especially sensitive to wage increases as it tends to be the largest part of the cost base of businesses in the sector.
A particular reason why the services sector of different global economies continues to have high inflation is that during the period of pandemic-era restrictions, people were mostly unable to buy services such as restaurant meals but they were able to buy physical goods.
When restrictions came to an end, consumer spending patterns switched, in that they bought a greater-than-normal proportion of services and a lower-than-normal proportion of goods.
So even if there was no growth in demand in the economy (that is, gross domestic product was stagnant) the extra demand for services pushed prices up in that part of the economy.
Schroders senior European economist Azad Zangana says wages are the biggest expense of services businesses, but he expects wage growth to begin to fall in economies generally over the coming year, which should contribute to lower service-sector inflation, as he feels the sector has been one area where some signs of a wage-price spiral have been evident.
Moëc agrees, but he says wages may be slower to fall in Europe than in some other countries as they are more often set via collective or industry-wide bargaining agreements.
Different this time?
He says it is usually the case with inflation that “the last mile is the hardest” as the initial factors that cause a material increase in inflation fade from the data, but the lingering impact of those price pressures means the deceleration in inflation slows.
