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Megan Greene from the Bank of England expresses concern over rising inflation expectations, which remain anchored. She notes emerging slack in the UK labour market and ongoing disinflation.
Wage growth surpasses model predictions, indicating supply issues may be more concerning than demand. Greene points out that sensitivity to inflation could lead to second-round effects.
Upside risks to gas prices are moderate, and the quality of UK statistics adds to the uncertainty. Wage growth is not declining as expected, while tariffs could have a disinflationary impact.
Uncertainty Around Economic Indicators
Productivity growth poses another downside risk.
Greene’s remarks suggest that whilst inflation expectations have not yet lost their anchor, there is increasing anxiety around the durability of that stability. To put it plainly, expectations remain controlled for now, but there’s a mounting list of data that could start nudging those views upwards. The concern here is that we may be getting too comfortable, even as new pressures appear on the horizon.
UK wage growth, in particular, is running above what traditional forecasting models would anticipate. This mismatch flags structural frictions on the supply side of the labour market. In blunt terms, the issue doesn’t seem to be that businesses are overheated with demand, but more that there’s a marked shortfall in how effectively the economy is supplying labour. This might suggest a more persistent wage pressure than previously anticipated.
Implications Of Wage And Inflation Dynamics
Greene highlights the possibility of second-round effects, where workers and firms begin to react to inflation with anticipatory price or wage changes of their own, thereby entrenching the very trend they seek to hedge against. We should not underestimate this. A shift like this could harden inflation dynamics at just the wrong time.
On energy, while the threat from gas prices hasn’t disappeared, it’s described as moderate—perhaps reflecting both easing global pressures and improved domestic capacity to cope with price swings. This offers only mild relief, though, particularly when viewed alongside issues with data quality in national statistics. With gaps or inconsistencies in the numbers policymakers rely on, the room for missteps grows. We, as analysts, have to be especially discerning when judging real movements versus noise.
Tariff activity, by contrast, might contribute to slowing price growth. The implication here is that imported cost pressures could start to ease, assuming trade patterns remain predictable and currency fluctuations don’t complicate import pricing further. That, however, is not guaranteed.
Another thread picked out relates to productivity. Weak output per hour worked limits the economy’s ability to grow without stoking inflation. Reinforcing this, sluggish productivity growth makes it harder for businesses to absorb higher wages without raising prices.
Altogether, for traders engaging with rate-sensitive products, there are several sharp points to keep an eye on. Wage dynamics are not aligning with disinflation hopes, and we should be wary of assuming that progress on headline inflation equals policy comfort. Reassessment is likely on the way. And with data uncertainty high, market reactions could be broader in reach and less anchored to firm reference points.
Adjustments in positions may need to be more responsive than usual, particularly as wage and productivity indicators feed into second-half outlooks. Timing entries and exits with a clearer view on pay trends could prove more influential than anticipated. Avoid assuming too much from headline inflation alone—it’s the parts beneath that warrant closer watching.
