Megan Greene, an external member of the Bank of England's Monetary Policy Committee, warns inflation has not returned to target in many countries, with rate hike cycles already underway. She points to the ongoing impact of post-COVID inflation and the critical interaction between monetary policy and external shocks, such as the conflict involving Iran, which directly affects oil prices and inflation.
The UK economy faces weak growth, with underlying GDP at just 0.2% per quarter. Greene attributes this to both weak demand and severe supply-side constraints. "If you had more demand than that, it could actually end up becoming inflationary," she notes, stressing that the UK's supply-side weakness makes the economy especially sensitive to any uptick in demand.
A key concern is inflation persistence. The UK has seen inflation above target for nearly five years, and repeated negative supply shocks have made households and businesses more attentive to price changes. Greene warns that wage growth expectations are stalling, with pay settlement growth projected to drop slightly, signaling a potential slowdown in disinflation. Firms have shifted to "state-dependent pricing," setting prices more frequently when inflation is high, which accelerates cost pass-through and reinforces price pressures. Greene concludes that inflation persistence remains a critical issue, exacerbated by geopolitical risks and structural supply-side vulnerabilities.