monetary policy outlook : a common process of monetary policy ‘ normalisation ’ after the long period of exceptional support initiated in the face of the global financial crisis in 2007 - 08 and continued to a large extent through to the pandemic of 2020 - 21 ; the need for monetary policy to address the inflationary consequences of tight labour markets and strong firm pricing power in the us and the uk ; and the challenges for monetary policy created by the significant adverse terms of trade shock to europe – including the uk – which has followed from russia ’ s invasion of ukraine, disruptions to natural gas and food supplies, and the resulting much higher level of european wholesale natural gas and food prices. as the simple schematic sets out, none of these challenges is unique to the uk. but – at least in the way i have described it – the uk is distinctive in facing all three of these challenges at the same time. in itself, this simultaneity creates its own challenges for monetary policy. in formulating its decisions, the mpc needs to layer the consequences of each of these driving factors on top of one another in coming to its final policy choice. the more layers involved, the more complex is that process – and its communication. all the more so when each layer has its own, distinctive characteristics : some drivers of inflation being more secular in nature, others more cyclical ; some consistent with the ‘ divine coincidence ’ of efforts to stabilise demand and price developments, others implying management of difficult trade - offs between activity and inflation. but the challenges for monetary policy are greater when the factors not only cumulate, but also interact with one another in possibly divisive and often unhelpful ways as regards the pursuit of price stability. in other words, when the various underlying drivers of policy decisions are not only additive as regards their implications for inflation, but also potentially multiplicative. to give the most straightforward but also immediately relevant example : the scope for energy price rises to trigger the infamous second round effects in price, wage and cost dynamics – the dynamics that threaten to create persistence in inflation even after the original external stimulus abates – is greater when the corporate sector enjoys pricing power, and the labour market is tight. beyond the implications of the individual risks themselves, the combination of and interaction among those risks can create additional challenges for monetary policy. this is something to which i will return in discussing the outlook for uk monetary policy. factors underlying monetary policy decisions but let me start by reviewing

only has given a significant impetus to inflation through a combination of direct effects on household utility bills and indirect effects owing to the use of energy as an intermediate input to the production of other goods and services. it is also likely to have implications for price and wage setting dynamics. for energy importers like the countries of western europe including the uk, a rise in international energy prices represents a substantial adverse terms of trade shock. [ 7 ] simply put, the price of what they are buying from the rest of the world has risen considerably relative to the price of what they are selling to the rest of the world. to the extent that any implied deterioration in the terms of trade is permanent, there will be a real hit to those countries real income, which must be absorbed by some domestic actor. in other words, in the end, someone in the uk will have to bear the cost of a higher aggregate uk energy bill. the important question for an inflation targeting central bank is how that happens ; in particular, how pragmatic and realistic uk firms and households are in accepting the macroeconomic implications of the higher imported energy and goods prices. in an attempt to protect their own real income from the unavoidable impact of higher external prices, the longer that firms try to maintain real profit margins and employees try to maintain real wages at pre - energy price shock levels, the more likely it is that domestically - generated inflation will achieve its own self - sustaining momentum even as the external impulse to uk inflation recedes. monetary policy cannot prevent the loss of real national income stemming from the deterioration of the terms of trade. that is a real shock, with real consequences that ultimately monetary policy cannot offset. nor can or should monetary policy seek to influence the distributional impact of the terms of trade shock on specific sectors or regions. as a relatively blunt instrument, monetary policy is not well suited to such a task, which would any way extend beyond its established mandate. what the bank can do – and indeed must do, if it is to achieve its price stability mandate – is ensure that any self - sustaining momentum in inflation at rates above the 2 % target is squeezed out of the system by constraining demand relative to supply as necessary. ‘ multiplicative effects ’ and says ’ law this naturally leads back to where i started : while pricing power in tight goods and labour markets can be analysed as a source of inflationary pressure distinct from energy price rises, these two factors can – and do – interact with