We know how hard the impact of higher inflation has been on households over the past year, and that the least well off have been hardest hit. Low and stable inflation is vital so that money holds its value and people and businesses are able to plan for the future. We also know from previous experience that raising interest rates will help to bring inflation down more quickly, then make sure it remains low.

Consumer Price Inflation (CPI) has started to fall but, at 10.1%, is still very high and well above the Monetary Policy Committee’s (MPC) 2% target. We expect inflation to fall rapidly in 2023, but to make sure that happens the MPC has increased interest rates to 4%. This means that since December 2021, we have increased our interest rate in total from 0.1% to 4%. The MPC is conscious that this means many people face higher borrowing costs, but high inflation that lasts for a long time makes things worse for everyone.

One of the main reasons why inflation has been so high is because of past rises in energy prices due to Russia’s invasion of Ukraine. Having to pay higher prices for goods we buy from abroad has also played a big role; costs have risen because companies selling consumer goods struggled to get enough of them from overseas suppliers to meet higher demand from customers during the pandemic.

At the same time, there are fewer people in the UK looking for work following the pandemic. The proliferation of job vacancies means employers have to offer higher wages to recruit and hold on to staff. In response to these rising costs, UK businesses have been increasing their prices.

Looking ahead, the Bank expects costs to rise less rapidly, thanks in part to the introduction of the government’s energy price cap scheme for households and businesses, and a recent significant fall in oil and gas prices. The price of goods should rise more slowly as the supply shortages many companies have faced start to ease. At the same time, higher interest rates should reduce demand for goods and services in the economy, which will help to further slow the rate of price inflation.

However, higher global energy and goods prices mean households have less to spend on other things. As a result, the economy has not been growing and we expect GDP to fall slightly this year. There are still many uncertainties about the outlook and the extent to which inflationary pressures ease will depend on how the economy evolves.

The MPC will continue to monitor developments closely, including the impact of the significant increases in interest rates over the past year, which is yet to be fully felt. We have done a lot already, but we have only just begun to turn the corner on inflation. For that reason, the MPC will continue to look closely for signs of persistent inflation when it takes its next decision on interest rates in March. 

Lai Wah Co is the Bank of England’s Deputy Agent for Greater London