It needs to recognise that the improving terms of trade driving those improved prospects for activity is simultaneously weighing on both inflation (through the direct and indirect effects of energy price falls) and inflation persistence (by reducing the intensity of the distributional conflict, as the foreign claim on domestically generated economic surplus falls back). Having said that, some part of the recent positive news to UK employment and activity might have a less benign interpretation as regards inflation prospects. If it were to reflect a new positive demand shock, rather than the unwinding of the deterioration in the terms of trade, then – other things equal – it would strengthen the case for further monetary tightening. In that case, the recent improvement in the prospects for UK employment would challenge the view embodied in the MPC’s February forecast that an easing in the labour market – as reflected in higher unemployment, a lower vacancy-to-unemployment ratio, or less job churn – will ultimately weigh against persistent inflationary pressures. In interpreting the implications of recent data for monetary policy, the MPC will need to exercise its judgement about which of these two underlying stories is more relevant. Concluding remarks In February, the MPC signalled that it had adopted a more ‘data-dependent’ stance. This was consistent with establishing a clear inflection point in the upward path of Bank Rate – but not necessarily a pause, still less a turning point.
Response to the Bank of England’s Decision Maker Panel (DMP) survey shed light on the potential for such changes in corporate pricing behaviour. The slides accompanying this talk illustrate these data. 22. This point has been well-articulated in the euro area context in a recent ECB blog: Arce, O., E. Hahn and G. Koester (2023). ‘How tit-for-tat inflation can make everyone poorer,’ ECB. 23. For a discussion of this issue, see Lorenzoni, G., and I. Werning (2023). ‘Wage price spirals,’ MIT working paper. 24. An illustration of this point is contained in the slides that accompany this evening’s talk. My thanks are owed to Philip Schnattinger and Brad Speigner for their considerable help in articulating the argument. 25. For a discussion of this in the US and European contexts, see Rotemberg, J.J. and M. Woodford (1999). ‘The cyclical behaviour of prices and costs,’ ch. 16 in Handbook of Macroeconomics 1(B), pp. 1051-1135, Elsevier and Galí, J., M. Gertler and D. Lopez-Salido (2001). ‘European inflation dynamics,’ European Economic Review 45, pp. 1237-1270. 26. See Layard, R., S.J. Nickell and R. Jackman (2005). Unemployment: Macroeconomic performance and the labour market. Oxford University Press. 27. See Pissarides, C.A. (2000). Equilibrium unemployment theory. MIT Press. Huw Pill Chief Economist and Executive Director, Monetary Analysis  ©2023 Bank of England