J.P. Morgan: UK inflation expectations continue to move upwards

J.P. Morgan: UK inflation expectations continue to move upwards

April 19, 2022

Inflation UK
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Surging UK inflation sharpens the dilemma facing the Bank of England that we highlighted in March. Rising living costs could reduce consumer demand and slow the economy, doing some of the Bank’s work for it. Yet policymakers will also be wary that the combination of a tight labour market and surging prices risks what they fear most, a wage-price spiral.

The Bank, therefore, will be closely monitoring medium term inflation expectations. One way of monitoring these is via the 5-year/5-year inflation swap rate which has been climbing steadily but has not shown the kind of sharp upward moves that would really worry the Bank. This suggests that while pressure is mounting the Bank can still afford to raise rates relatively gradually. We think the Bank will continue raising rates steadily over the summer but will keep a watchful eye on how the consumer is holding up.

19042022 J.P. Morgan

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