Bank of England — Inflation Report (UK, 2018)

Inflation Report May 2018 On 30 May 2018, the number for national house price inflation in 2018 Q1 on page 16 was corrected to 2.6% from 2.1%. Inflation Report May 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/may-2018   Bank of England 2018 ISSN 2514-4103 (Online) Contents Monetary Policy Summary 1 Global economic and financial market developments The momentum in global growth 1.1 1.2 Global inflation and monetary policy expectations 1.3 Credit conditions facing UK households and companies Box 1 Monetary policy since the February Report Box 2 Factors influencing the cost of borrowing for households and companies 2 Demand and output 2.1 Net trade and business investment 2.2 Household spending 2.3 Government Box 3 The role of temporary factors in recent output growth Box 4 Implications of recent developments in the car market for consumer spending 3 Supply and the labour market Labour market developments and slack 3.1 3.2 Productivity 4 Costs and prices 4.1 Consumer price developments and the near-term outlook 4.2 External cost pressures 4.3 Domestic cost pressures 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 5 How has the economy evolved relative to the February 2017 Report? Box 6 Other forecasters  expectations Glossary and other information i 1 1 3 5 6 8 10 11 14 18 12 17 19 19 21 23 23 24 26 27 29 31 37 39 43 44 Inflation Report May 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 9 May 2018, the MPC voted by a majority of 7 2 to maintain Bank Rate at 0.5%. 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. The MPC s updated projections for inflation and activity are set out in the May Inflation Report. The outlook and the main factors shaping it are broadly similar to those set out in the previous Report. The preliminary estimate of GDP growth in the first quarter was 0.1%, 0.3 percentage points lower than expected in February. This is likely in part to have reflected adverse weather in late February and early March. Survey indicators suggest that growth was somewhat stronger in Q1 than implied by the preliminary estimate. Despite the near term softness, the MPC s central forecast for economic activity is little changed from that in the previous Report. 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. On the expenditure side, growth continues to rotate towards net trade and business investment and away from consumption. Although business investment is still restrained by Brexit related uncertainties, it is being supported, like exports, by strong global demand and accommodative financial conditions. Household consumption growth remains subdued, in line with the modest growth in real income over the forecast period. Wage growth and domestic cost pressures are firming gradually, broadly as expected. The MPC continues to judge that the UK economy has a very limited degree of slack. Hiring intentions have remained strong and, over the past three months, the unemployment rate has fallen slightly further. While modest by historical standards, the projected pace of GDP growth over the forecast is nonetheless slightly faster than the diminished rate of supply growth, which averages around 1 % per year. In the MPC s central projection, therefore, a small margin of excess demand still emerges by early 2020, feeding through into higher rates of pay growth and domestic cost pressures. CPI inflation fell to 2.5% in March, lower than expected at the time of the February Report. The inflation rates of the most import intensive components of the CPI appear to have peaked. The MPC judges that the impact of the past depreciation of sterling on CPI inflation, while remaining significant, is likely to fade a little faster than previously thought. Taking external and domestic influences together, CPI inflation is projected to fall back slightly more quickly than in February, reaching the target in two years. These projections are conditioned on a gently rising path for Bank Rate over the next three years. In the exceptional circumstances presented by Brexit, as specified in its remit, the MPC has been balancing any significant trade off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity. The prospect of excess demand over the forecast Inflation Report May 2018 Monetary Policy Summary ii period has reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target. The Committee s best collective judgement therefore remains that, were the economy to develop broadly in line with the May Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon. As previously, however, that judgement relies on the economic data evolving broadly in line with the Committee s projections. For the majority of members, an increase in Bank Rate was not required at this meeting. All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent. Inflation Report May 2018 Section 1 Global economic and financial market developments 1 1 Global economic and financial market developments Although momentum in global activity has eased slightly since the start of the year, growth remains robust. The recovery in global growth since 2016 has meant that spare capacity in advanced economies has diminished and, in some countries, inflationary pressures have begun to rebuild. Global financial conditions remain accommodative, despite a rise in short-term interest rates and, more recently, a fall in equity prices. Table 1.A UK-weighted GDP growth slowed slightly in Q1 GDP in selected countries and regions(a) Percentage changes on a quarter earlier Averages 2017 2018 1998 2007 2012 13 2014 15 2016 2017 H1 Q3 Q4 Q1 0.7 United Kingdom 0.6 Euro area (38%) 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 1.5 0.6 0.6 0.4 0.7 0.4 0.6 1.7 0.1 1.8 -0.3 -0.7 0.6 0.5 0.5 0.5 1.7 0.4 1.7 0.1 -0.6 0.6 0.3 0.5 0.7 0.7 0.5 0.8 1.8 1.7 0.5 0.6 1.5 1.8 0.9 0.0 0.9 0.2 0.8 0.8 0.4 0.7 0.7 1.6 0.4 1.8 -0.4 0.1 0.7 0.1 0.4 0.6 1.4 n.a. n.a. n.a. n.a. 0.6 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 Q1 is a Bank staff projection. Chart 1.1 The composition of advanced-economy growth has rotated towards investment Contributions to four-quarter GDP growth for selected advanced economies(a) Percentage points GDP growth (per cent) Household consumption Investment Other spending 2011 12 13 14 15 16 17 Sources: IMF WEO, OECD, Thomson Reuters Datastream and Bank calculations. (a) Co