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However, the ingredients for an improvement in the inflation outlook means current market expectations of rates peaking at close to 6 per cent, and all the economic effects that would entail, look too pessimistic.
A still-tight jobs market and recent upside surprises in both services inflation and private sector pay growth probably satisfy the MPC’s criteria for evidence of ‘persistent’ inflationary pressure, which would lead to another rate rise.
But not all recent inflation developments have been adverse. Producer price inflation has continued to fall, as have households’ and businesses’ inflation expectations, while growth in the money supply has slowed to a fraction of 2021’s peak, EY ITEM Club said in a release.
While wholesale energy prices have been volatile, the general direction has remained downward. And an unexpectedly large fall in inflation in the euro zone suggests that there's nothing inevitable about the current bout of strong price pressures proving sticky, it noted.
As a result, the EY ITEM Club thinks current market expectations for five additional rate rises beyond June would represent too much monetary tightening and that the MPC may push back against predictions of such significant measures in its next policy statement.
However, much will depend on May’s inflation data, which is published the day before the MPC’s policy announcement, it added.
Fibre2Fashion News Desk (DS)