Speaking at the UK Women in Economics annual networking event today (7 February), she said the fall in UK inflation – which slightly rose to 4% in December 2023 – was largely driven by a “fading of global inflationary shocks”, with energy and food prices significantly detracting from the headline figure.
Yet services inflation has remained high at around 6%, especially when compared to the US and eurozone, both of which are hovering at around the 4% mark.
Breeden noted the situation in the UK was largely attributable to differences in wage growth, “which is higher in the UK than elsewhere”.
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Although annual private sector regular average weekly earnings growth declined to 6.5% in the three months to November 2023, she noted it remained within the 6-7% range, which is “still elevated given the current weakness in productivity growth”.
As a result, wage and price persistence will be “incredibly important” over the next few months, Breeden argued, as the majority of this year’s wage setting is expected to end by April.
“What will actually happen to pay over the next few months will be influenced by a number of factors, including the path for inflation and inflation expectations, the tightness of the labour market and broader economic conditions more generally,” she said.
This is because the wage increases will feed through to inflation, but how they will do so will depend “heavily” on the economic environment they are made in.
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However, she argued that persistent inflationary pressures have been “embodied within our forecasts”, which has led her to become “less concerned that rates might need to be tightened further”.
“Instead, my focus, and indeed the focus of many on the MPC, has shifted to thinking about how long rates need to remain at their current level,” she said.
“I will look at how pay growth and demand are influencing firms’ pricing decisions, to assess how persistence is evolving in relation to what is embodied within our forecast. And that will allow me to be more confident that inflation will return sustainably to target in the medium term.”
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