And the BoE’s chief economist Huw Pill recently stated that while a summer cut did not seem unreasonable, there was still some way to go to bring inflation down to the target level, highlighting the fact that rates of pay growth remain well above that consistent with meeting the 2 per cent target sustainably.
Numbers game
Remember, though, that in the MPC’s case, majority rules. Only three more members need to switch their vote – Bailey, Ben Broadbent and Sarah Breeden seem the most likely candidates.
For these members to vote for a cut, they will need to be assured that the second-round effects on wages and domestic prices are fading as hoped.
The good news is the committee will have CPI data for both May and June and labour market data for April, May, and June by the August meeting.
The MPC probably will continue to place less weight on the labour force survey data, given the ongoing sampling issues that will not be remedied until at least September. Note that the latest MPR had a full box dedicated to the survey’s flaws.
The wage data are from a different survey, so are more reliable, but Bailey suggested at the latest press conference that the data have been particularly volatile recently and that little weight would be placed on one month’s reading.
The MPC will, therefore, continue to look to the CPI data for clarity. On this front, the news is mixed.
CPI inflation should continue to tick down, as goods and food CPI inflation both continue their decline. Base effects will also help, as the large increases in services prices last year drop out of the annual comparison.
But the broad-based strength in services in April means we think the decline will be slow going; core inflation likely will not fall enough to return the headline rate to target over the next couple of months.
Base effects are the impacts of the previous time period's data on the current time period.
The MPC's remit concerns the outlook for inflation over the medium term, so members should look through any near-term strength if they think inflation will be undershooting the target in two years’ time.
By August, the majority of members should be comfortable this is the case.
Indeed, timely data, such as the prices charged balance in the S&P Global composite PMI and the prices and wages expectations indices in the BoE’s decision-maker panel survey, all suggest wage growth and services inflation should start to slow once the impact of the national living wage has filtered through.
