BoE's Greene expresses concern that "stance is not restrictive enough"

Further moderation in wage growth is needed to achieve the Consumer Price Index (CPI) target, Megan Greene, a member of the Bank of England's (BoE) Monetary Policy Committee (MPC), said on Tuesday. She also voiced concern “over [the] BoE estimate of target-consistent pay growth,”.

The monetary policy stance “is not restrictive enough,” Greene worries, while she also noted that “inflation expectations are anchored above norms.”

What are the key takeaways?

BoE's estimate of pay growth compatible with the target raises concerns

A 2% inflation rate is consistent with wage growth of 3%

Meeting the CPI target requires a further slowdown in wage growth

Inflation above 3% attracts people's attention

Numerous supply shocks will persist

An insufficiently restrictive policy stance remains a concern

Inflation expectations remain anchored at levels above the norm

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Common questions about inflation

How is inflation defined?

The increase in the cost of a representative basket of goods and services is measured by inflation. Headline inflation is generally reported as a percentage change, both month-on-month (MoM) and year-on-year (YoY). Food and fuel, whose prices can shift with geopolitical developments and seasonal factors, are among the more volatile components excluded from core inflation. Economists concentrate on this core measure, which is also targeted by central banks. Their mandate is to maintain inflation at a manageable level, typically around 2%.

What does the Consumer Price Index (CPI) measure?

Changes in the prices of a basket of goods and services over time are tracked by the Consumer Price Index (CPI). The measure is generally reported as a percentage change on both a month-on-month (MoM) and year-on-year (YoY) basis. Central banks target core CPI, which leaves out volatile food and fuel components. A rise in core CPI above 2% typically leads to higher interest rates; a decline below 2% generally has the reverse effect. Higher rates support a currency, so rising inflation usually strengthens it. Falling inflation tends to have the opposite impact.

How does inflation affect currency markets?

A country's currency tends to strengthen when inflation is high and weaken when it is low, a relationship that may appear counter-intuitive. To curb elevated inflation, the central bank will usually increase interest rates. Those higher rates draw additional global capital from investors seeking attractive returns on their money.

Why do changes in inflation affect Gold prices?

Historically, investors sought Gold during periods of high inflation for its ability to retain value. They still frequently buy it as a safe haven when markets face extreme turmoil, but this is not the usual pattern. The reason is that central banks respond to high inflation by raising interest rates. For Gold, higher rates are a negative: they raise the opportunity cost of holding the metal rather than an interest-bearing asset or keeping money in a cash deposit account. Conversely, lower inflation generally supports Gold by bringing interest rates down and making the precious metal a more attractive investment alternative.