- What people think will happen dictates how long high inflation persists
- Policymakers have not done a good job of managing expectations
After 15 years of low and stable inflation, the past 18 months have been a shock to the system. But where we go from here is tied up in a web of muddled official communications from the Bank of England (BoE), unhelpful addtional comments from its senior staff and the fact that workers and businesses feel poorer and are taking action to stop that.
Although the overall rate of inflation slowed to 8.7 per cent from 10.1 per cent in April, some troubling dynamics are at play. Core inflation, which reflects domestic inflationary pressures, actually accelerated to 6.8 per cent– the highest rate since 1992. This will worry the BoE, which was already concerned about ‘second-round’ inflation effects because of rising wage demands and businesses upping their prices. Governor Andrew Bailey said earlier this month that these second-round effects were "unlikely to go away as quickly as they appeared”. The latest figures suggest he is right.