Bank of England — Inflation Report (UK, 2018)

Inflation Report August 2018 On 16 October 2018, the footnote for Chart D on page 19 was amended to read:  Wealth decile defined by total gross financial wealth.  The footnote previously read  Wealth decile defined by total net financial wealth as defined in Chart A.  Inflation Report August 2018 In order to maintain price stability, the Government has set the Bank s Monetary Policy Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%. Subject to that, the MPC is also required to support the Government s economic policy, including its objectives for growth and employment. The Inflation Report is produced quarterly by Bank staff under the guidance of the members of the Monetary Policy Committee. It serves two purposes. First, its preparation provides a comprehensive and forward-looking framework for discussion among MPC members as an aid to our decision-making. Second, its publication allows us to share our thinking and explain the reasons for our decisions to those whom they affect. Although not every member will agree with every assumption on which our projections are based, the fan charts represent the MPC s best collective judgement about the most likely paths for inflation, output and unemployment, as well as the uncertainties surrounding those central projections. This Report has been prepared and published by the Bank of England in accordance with section 18 of the Bank of England Act 1998. The Monetary Policy Committee: Mark Carney, Governor Ben Broadbent, Deputy Governor responsible for monetary policy Jon Cunliffe, Deputy Governor responsible for financial stability Dave Ramsden, Deputy Governor responsible for markets and banking Andrew Haldane Ian McCafferty Michael Saunders Silvana Tenreyro Gertjan Vlieghe PowerPoint  versions of the Inflation Report charts and Excel spreadsheets of the data underlying most of them are available at www.bankofengland.co.uk/inflation-report/2018/august-2018   Bank of England 2018 ISSN 2514-4103 (Online) Contents Monetary Policy Summary 1 Global economic and financial market developments The euro area The United States Emerging market economies 1.1 1.2 1.3 1.4 UK financial conditions Box 1 Monetary policy since the May Report 2 Demand and output 2.1 Near-term outlook 2.2 Consumer spending 2.3 Housing 2.4 Net trade and the current account 2.5 Business investment 2.6 Government Box 2 Implications of changes to the ONS GDP publication timetable Box 3 Developments in broad money Box 4 Household balance sheets 3 The labour market and pay 3.1 Labour market tightness 3.2 Developments in pay growth 3.3 The outlook for pay and labour costs Box 5 Agents  update on business conditions 4 Costs and prices 4.1 Consumer price developments and the near-term outlook 4.2 External cost pressures 4.3 Domestically generated inflation 4.4 Inflation expectations 5 Prospects for inflation The MPC s key judgements and risks 5.1 5.2 The projections for demand, unemployment and inflation Box 6 The equilibrium interest rate Box 7 Other forecasters  expectations Glossary and other information i 1 3 4 5 7 9 10 10 12 15 16 16 17 11 13 18 20 20 21 22 23 26 26 26 28 29 30 32 38 39 44 45 Inflation Report August 2018 Monetary Policy Summary i Monetary Policy Summary The Bank of England s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 1 August 2018, the MPC voted unanimously to increase Bank Rate by 0.25 percentage points, to 0.75%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at  10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at  435 billion. Since the May Inflation Report, the near-term outlook has evolved broadly in line with the MPC s expectations. Recent data appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter. The labour market has continued to tighten and unit labour cost growth has firmed. The MPC s updated projections for inflation and activity are set out in the August Inflation Report and are broadly similar to its projections in May. In the MPC s central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP is expected to grow by around 1 % per year on average over the forecast period. Global demand grows above its estimated potential rate and financial conditions remain accommodative, although both are somewhat less supportive of UK activity over the forecast period. Net trade and business investment continue to support UK activity, while consumption grows in line with the subdued pace of real incomes. Although modest by historical standards, the projected pace of GDP growth over the forecast is slightly faster than the diminished rate of supply growth, which averages around 1 % per year. The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years. CPI inflation was 2.4% in June, pushed above the 2% target by external cost pressures resulting from the effects of sterling s past depreciation and higher energy prices. The contribution of external pressures is projected to ease over the forecast period while the contribution of domestic cost pressures is expected to rise. Taking these influences together, and conditioned on the gently rising path of Bank Rate implied by current market yields, CPI inflation remains slightly above 2% through most of the forecast period, reaching the target in the third year. The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal. The Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting. The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent. Inflation Report August 2018 Section 1 Global economic and financial market developments 1 1 Global economic and financial market developments The outlook for global activity appears to have moderated slightly and financial conditions have tightened somewhat, particularly in emerging market economies. Growth is expected to remain relatively robust, however. UK financial conditions have tightened slightly, but remain accommodative overall. Table 1.A Global GDP growth was broadly stable in Q2 GDP in selected countries and regions(a) Percentage changes on a quarter earlier Quarterly averages 2018 1998 2007 2012 13 2014 15 2016 2017 H1 2017 H2 Q1 Q2 0.7 United Kingdom 0.6 Euro area (39%) 0.7 United States (18%) China (3%)(b) 2.5 0.3 Japan (2%) 1.8 India (1%) Russia (1%)(c) 1.9 Brazil (1%) 0.8 UK-weighted world GDP(d) 0.7 0.5 0.0 0.5 1.9 0.4 1.6 0.5 0.6 0.4 0.7 0.4 0.4 0.5 0.6 0.5 1.7 1.7 0.1 0.4 1.7 1.8 -0.3 0.1 -0.7 -0.6 0.6 0.6 0.3 0.7 0.6 1.7 0.6 1.5 0.6 0.8 0.7 0.4 0.2 n.a. 0.7 0.4 0.3 1.0 0.6 0.5 1.7 1.8 1.4 0.4 -0.2 n.a. 1.9 1.9 n.a. -0.1 0.9 n.a. 0.2 0.4 n.a. 0.8 0.6 0.7 Sources: IMF World Economic Outlook (WEO), National Bureau of Statistics of China, OECD, ONS, Thomson Reuters Datastream and Bank calculations. (a) Real GDP measures. Figures in parentheses are shares in UK goods and services exports in 2016. (b) The 1998 2007 average for China is based on OECD estimates. Estimates for 2008 onwards are from the National Bureau of Statistics of China. (c) The earliest observation for Russia is 2003 Q2. (d) Constructed using data for real GDP growth rates for 180 countries weighted according to their shares in UK exports. Figure for 2018 Q2 is a Bank staff projection. Chart 1.1 Global export orders growth slowed sharply Global purchasing managers  indices(a) Differences from averages since 2000 (number of standard deviations) Manufacturing Export orders Composite 2012 13 14 15 16 17 18 Sources: JPMorgan and Markit Economics. 1.0 0.5 + 0.0   0.5 1.0 1.5 (a) Measures of current monthly output, manufacturing output and export orders growth based on the results of surveys in 44 countries. Together these countries account for an estimated 89% of global GDP. Data are to June 2018. Global GDP growth is estimated to have remained broadly stable in 2018 Q2, a little weaker than expected at the time of the May Report, having dipped slightly in Q1 (Table 1.A). Although growth in the US was stronger than expected, activity was somewhat weaker elsewhere. Indicators suggest that the outlook for global growth has moderated slightly, though remains relatively robust. There are signs of slowing in manufacturing and export-focused sectors (Chart 1.1). Consistent with that, growth in global trade and capital goods orders have also declined (Chart 1.2). Most indicators of activity, however, remain above past averages. Global demand growth is expected to remain at a little under  % on a UK trade-