Bank of England rate-setter Swati Dhingra expects the pressure on UK households to ease after dramatic falls in cost inflation for producers that should soon feed through to prices for consumers.
(Bloomberg) — Bank of England rate-setter Swati Dhingra expects the pressure on UK households to ease after dramatic falls in cost inflation for producers that should soon feed through to prices for consumers.
“There are some promising signals that CPI inflation should ease,” Dhingra said in a speech at a UK Women in Economics Network event on Tuesday. “One of the best leading indicators… of the long-run evolution of prices in the country is that producer price inflation typically tends to lead changes in consumer price inflation.”
Dhingra, one of the most dovish BOE policy makers, used her speech to show a long-running tight correlation between producer price inflation and the costs passed onto consumers.
While consumer price inflation is stuck at 8.7%, indicators of producer cost increases have dropped dramatically. Official data show the price of goods leaving factory gates rose 2.9% in the 12 months through May, down from a peak of almost 20% less than a year earlier. Fuel and raw material prices were up just 0.5%.
Food remains the biggest holdout, Dhingra said, with most other items of consumption now showing signs of following the PPI. The stickiness of food inflation may be due to the cost of imported goods and wages, which are now starting to ease.
Along with fellow dove Silvana Tenreyro, Dhingra has rebelled on the Monetary Policy Committee by voting to end the BOE’s quickest tightening cycle in more than three decades. That’s despite her colleagues on the MPC voting to step up the pace of interest rate rises again last week.
While Dhingra showed a sharp correlation of producer and consumer costs stretching back 70 years, the BOE has been consistently overly optimistic on how quickly inflation will fall back in its projections. The MPC said in its meeting minutes on Thursday that several inflation indicators have been much higher than its last forecasts in May.
Dhingra said there are still concerns about food price inflation but added that supermarkets are not enjoying the “runaway” profits associated with so-called greedflation.
“I think it’s not very convincing to argue, at least as of yet, that grocery inflation is driven by greedflation.”
Dhingra said there has been a “very, very sharp drop in producer price inflation” that has received little attention, with consumer costs historically later easing with a lag of around one or two quarters.
“We can start to feel a little bit reassured that there’s some promising evidence out there that the producer price inflation drop has been broad-based across the consumption basket,” she said.
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