David Ramsden: Outlier or laggard - divergence and convergence in the UK's recent inflation performance

Speech by Sir David Ramsden, Deputy Governor for Markets and Banking of the Bank of England, at the Peterson Institute of International Economics, Washington DC, 19 April 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Thank you to the Peterson Institute for the invitation to participate in today's event focussing on the CEPR volume on monetary policy responses to the post-pandemic inflation. In line with the title of this panel I want to provide an update on my assessment of the evidence on what has caused the UK's inflation. This evidence covers the key indicators of inflation and in particular persistence as well as associated analysis and what this implies for the extent to which the risks from persistence are receding.

Economic forecasters have had a challenging time over the last few years in forecasting the inflation process, given the series of unprecedented and overlapping shocks which have hit the global economy. These challenges were highlighted in Ben Bernanke's comprehensive review of the Bank's approach to, and use of forecasting published last week. A key recommendation of the Bernanke review is that the Bank should make more systematic use of scenarios in framing the outlook for inflation and the implications for monetary policy, in a world characterised by greater uncertainty and significant structural changes. The Bank has committed to implementing all the recommendations of the review. As someone who has used scenarios throughout my career, I think this is the right direction for the Bank to go in. But we should travel with a high degree of humility, given the ongoing uncertainties and complexities we face in forecasting inflation.

Throughout much of 2023 I was worried that the UK was an outlier among advanced economies, diverging in terms of inflation performance and the degree of persistence. And this was still a feature at the time of the MPC's last published forecast, in the Monetary Policy Report (MPR) published in early February. The MPC's forecast showed UK inflation first falling to the 2% inflation target in 2024Q2, before rising back to close to 3% by 2025Q1, largely due to persistence in domestic inflationary pressures.