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

Wage growth needs to slow further to meet the Consumer Price Index (CPI) target. That was the assessment on Tuesday from Megan Greene, a member of the Bank of England's (BoE) Monetary Policy Committee (MPC), who expressed concern “over [the] BoE estimate of target-consistent pay growth,”.

On the monetary policy stance, Greene voiced concern that it “is not restrictive enough,” adding that “inflation expectations are anchored above norms.”

Key points:

Concerns remain about the BoE's estimate of pay growth consistent with its target

3% wage growth is consistent with 2% inflation

Further slowing in wage growth is needed to achieve the CPI target

Above 3%, inflation becomes noticeable to people

Numerous supply shocks will continue

Insufficiently restrictive policy remains a concern

Inflation expectations remain anchored above normal levels

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Inflation: Key Questions Answered

Inflation: Measuring Price Increases

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

Consumer Price Index (CPI): Tracking Price Changes

Price movements across a basket of goods and services over a given period are tracked by the Consumer Price Index (CPI). The measure is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). Central banks target core CPI, which strips out volatile food and fuel components. A reading above 2% typically leads to higher interest rates; a reading below 2% usually has the reverse effect. Higher rates support a currency, so stronger inflation generally strengthens the currency as well. Falling inflation tends to have the opposite effect.

Inflation and Currency Values

A country's currency tends to appreciate when inflation is high and weaken when inflation is low, despite this relationship appearing counter-intuitive. The explanation lies in interest rates: central banks normally raise them to curb higher inflation. Those higher rates draw in more global capital from investors seeking attractive returns on their money.

Gold Prices: Inflation and Interest Rates

Gold historically served as a store of value for investors during periods of high inflation. Investors still often seek its safe-haven qualities during severe market turmoil, but this pattern does not hold in most circumstances. High inflation prompts central banks to raise interest rates to contain price pressures. For Gold, higher rates are a negative: they raise the opportunity cost of holding the metal rather than an interest-bearing asset or money in a cash deposit account. By contrast, lower inflation generally supports Gold by bringing interest rates down and making the metal a more attractive investment alternative.