I should say up front that the split between “global” and “domestic” sources of inflation is not, strictly speaking, an entirely clean one4. And I don’t really buy the argument one sometimes hears that monetary policy can’t do anything about the first – “imported” inflation, as it’s sometimes called – purely because it’s unable directly to affect the source of it. As the MPC cannot affect the global supply of oil, for example – this is how the argument goes – then it can’t do anything about an inflation caused by rising oil prices, even if that were to continue for a long time. That’s true, of course. But it’s also true of just about everything that might otherwise affect inflation, including the many domestic influences. Policy has no direct control over those, either. As long as you’ve got a floating exchange rate there’s nothing about being an open economy (and therefore subject to swings in import prices) that prevents monetary policy from controlling overall inflation, at least over the medium term. What being an open economy might mean, in the  Chart 6. Goods price inflation tends to be more volatile and less persistent than services inflation  shorter run, is that inflation is more volatile. That’s because prices of traded goods tend to be more volatile (Chart 6). And it’s here that the distinction is more significant. Take oil prices as an example.
These move around a lot more than those of non-traded goods and services and often have a significant and fairly immediate impact on the CPI. But that impact also tends to dissipate relatively quickly, after a year or so. And it’s for this reason, not because a change in interest rates can’t affect the supply of oil (obviously), that the orthodox response of monetary policy to a change in oil  Volatility measured as standard deviation over the sample (annual data 2001-21). Persistence measured as the lagged coefficient of a first-order auto-regressive model. Sources: ONS and Bank calculations. prices is in the first instance to look through it. By the time policy could really do anything to offset such a rise, allowing for the delay between action and effect, the direct impact on inflation would largely have disappeared. It’s in this context that, referring to the current surge in tradable goods prices, several policy makers have used the word “transitory”. By that they do not mean (and never meant) that these effects will be gone in one, two or even twelve months. As we saw at the start, thanks to the protracted way in which developments in wholesale markets feed through to the Ofgem cap, the recent jump in wholesale gas prices will directly 4  My predecessor Charlie Bean explained this point very clearly in a talk in Jackson Hole in 2006. 6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6  boost CPI inflation in the UK for twelve months.