BoE’s Dhingra sees ‘promising signals’ of a fall in UK inflation

By David Milliken

LONDON (Reuters) -Bank of England policymaker Swati Dhingra said there are “promising signals” for a further decline in British inflation, based largely on a steep fall in the rate of increase in prices which manufacturers charge to retailers.

Dhingra is one of two members of the BoE’s nine-member Monetary Policy Committee (MPC) who have consistently voted against the central bank’s interest rate rises since December.

In a speech to Britain’s Royal Economic Society, Dhingra highlighted a sharp drop in the annual rate of producer price inflation, which was 2.9% in May, its lowest in more than two years and down from a peak of 19.6% in July 2022.

Consumer price inflation (CPI), which is targeted by the BoE, peaked at 11.1% in October 2022 and has been slower to fall than the central bank expected, holding at 8.7% in May.

The BoE forecast last month that CPI would drop to just over 5% by the end of the year.

“There are some promising signals that CPI inflation should ease, and that’s mostly coming from … one of the best leading indicators … of the long-run evolution of prices in this country, producer price inflation,” Dhingra said.

Other BoE policymakers have focused more on wages and core inflation, a measure which strips out food, energy, alcohol and tobacco prices and which rose to a 31-year high last month.

Last week, the BoE’s MPC voted 7-2 in favour of a surprise half-percentage-point rise in rates to 5%, as the majority of members said inflation had been unexpectedly persistent.

Dhingra said she viewed core inflation as less useful for future inflation trends than producer prices, as it was still affected by factors such as rises in businesses’ electricity costs, just with more of a time delay.

Wage inflation was mostly a delayed response to high CPI, Dhingra said, and would slow as CPI began to fall. This was already visible in sectors such as retail and hospitality where labour costs have a big impact on prices paid by consumers.

One factor which could break the link between lower producer prices and falling inflation would be if businesses did not pass on lower prices, but Dhingra said there was little evidence of this so far in companies’ published earnings statements.

“It’s not very convincing to argue – at least as of yet – that grocery inflation is driven by ‘greedflation’,” she said.

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