Recent developments in these indicators have been mixed. The labour market remains tight on traditional indicators, with employment growth expected to be more resilient and unemployment rates lower than expected a few months ago. But wage developments – particularly higher frequency indicators of current momentum – appear to be easing, even as services price inflation surprised to the upside, albeit largely on the back of components typically though to be erratic on a month-to-month basis. The mixed character of developments in these key indicators makes it all the more important to keep a structural framework in mind on which to form judgements about the overall implications for inflation persistence and monetary policy. For the reasons I have developed above, the evolution of energy prices plays a key role. Now that that terms of trade shock is being at least partly reversed by the large and rapid fall of  Page 11  wholesale gas prices – both in absolute terms and relative to the path of futures upon which the MPC’s February macroeconomic forecast was conditioned – developments are moving in a more favourable direction. Relative to where we were a few months ago, the difficult ‘trade-off’ facing monetary policy as a result of the adverse terms of trade shock – that is to say, rising inflation in concert with a squeeze on domestic real incomes and spending – has eased. The MPC should be cautious about ‘looking a gift horse in the mouth’ by viewing better prospects for activity as something inherently inflationary.
Consistent with that, a further 25bp hike – smaller than the 50bp increases seen at previous meetings – was announced in March. Given the lags in monetary policy transmission, there is a lot of policy-in-the-pipeline still to come through. Nevertheless, on balance the onus remains on ensuring enough monetary tightening is delivered to ‘see the job through’ and sustainably return inflation to target. Although headline inflation is set to fall significantly in the course of this year owing to a combination of base effects and falls in energy prices, caution is still needed in assessing inflation prospects on account of the potential persistence of domestically generated inflation. I hope my remarks today have given some insight into how I am thinking – and will think – about the role inflation persistence will play in coming to monetary policy choices: focusing on intrinsic persistence through the lens of an interpretation of the incoming data using a structural story about  Page 12  price and wage setting behaviour. Of course, the evolution of inflation persistence against the background of the terms of trade shock stemming from Russia’s invasion of Ukraine is only one of many challenges facing monetary policy makers at present. It needs to be seen in the context of other economic disturbances, not least the recent turmoil in the financial sector. We have been told by our colleagues in the Financial Policy Committee that the UK financial system remains robust and resilient.