London Daily

Focus on the big picture.
Saturday, Aug 22, 2026

Controlling inflation is the battle of our times — and fortune will favour the bold

Controlling inflation is the battle of our times — and fortune will favour the bold

The Bank of England appears to be as confused as everybody when it comes to the outlook for interest rates. At the beginning of the month, a speech by the Bank’s Governor Andrew Bailey triggered hugely conflicting headlines. They ranged from “Bailey downplays talk of sharp rise in interest rates” to “interest rates may need to go higher” and through to “interest rates may have peaked”.
Meanwhile, members of the Bank’s rate-setting Monetary Policy Committee (MPC) like Catherine Mann and Swati Dhingra have adopted rather different views. I applaud the differences of opinion now emerging on the MPC. For too long it was open to accusations of groupthink. At least there is now evidence of genuine debate, even if Bailey’s own speech appears to offer a little too much by way of ambiguity.

Nevertheless, such debate suggests that we live in febrile economic times. No longer can we enjoy the combination of moderate growth and low inflation which characterised much of the period during which the Bank of England has controlled interest rates.

Such uncertainties are far from being uniquely British. At the beginning of the year, American investors began to believe that US policy rates were close to peaking. With inflation apparently tamed, there was genuine hope that before the year was out the Federal Reserve would be cutting interest rates again. This prompted a big rally in the stock market and a drop in longer-term borrowing costs. But since then American economic data has unexpectedly strengthened. There have been robust gains in employment and surprisingly strong increases in so-called “core” inflation, a measure that strips out the most volatile prices (for example, food and energy).

In response, the Federal Reserve’s chair, Jerome Powell, stated that “the ultimate level of interest rates is likely to be higher than previously anticipated”. He added that “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”.

This is strong stuff by central banking standards. The Fed has been in the vanguard of applying the monetary brakes, doing more than either the Bank of England or the European Central Bank. As yet, however, the US economy just isn’t doing what the Fed wants it to do. Powell clearly does not want to go down in history as the central banker who let inflation back in, but in the absence of any significant economic response so far, he risks one of two unpleasant outcomes: sustainably higher inflation or, in a bid to prevent such a result, a deep and unpleasant recession.

For the UK, the situation is arguably even more awkward. There’s a good chance that headline inflation will fall rapidly later this year, courtesy of declining gas prices. Yet pay growth is now relatively robust: excluding bonuses, wages in the private sector rose at an annual rate of 7.3 per cent in the final three months of 2022, a rate of increase hardly consistent with a two per cent inflation target over the medium term. Unless wage growth itself slows rapidly over the coming months, lower energy prices could trigger a reacceleration in consumer spending. What should the Bank then do? Cut rates because of lower headline inflation? Or raise rates because of robust wage growth and, just possibly, stronger domestic demand that later could lead to higher core inflation?

The Americans hoped they were in the former camp but have discovered they may be in a version of the latter camp. As for the UK, it is easy to pretend that the inflation we have suffered has stemmed only from malevolent foreign forces over which we have no control.

Imagine, however, if every country took the same view. We’d then be forced to conclude that inflation originated from Mars or Jupiter, not from planet Earth. While external shocks can be an important trigger for domestic inflation, its persistence ultimately depends not just on the length of those shocks but also on what the monetary authorities do in response. Those who act with sufficient confidence may ultimately keep inflation under control. Those who prefer, instead, to wait may discover they have opened a Pandora’s Box of domestic inflationary difficulties.

Stephen King (@kingeconomist) is HSBC’s Senior Economic Adviser. His new book, We Need to Talk About Inflation (Yale), will be published in April
Newsletter

Related Articles

0:00
0:00
Close
Petrol Bombs Set Luxury Cars Alight Outside Birmingham Wedding as Police Hunt Three Men
Bitcoin Surges Toward $80,000 as Short Squeeze and ETF Inflows Ignite Crypto Rally
Prince Harry and Co-Claimants Ordered to Pay £9.5 Million Toward Daily Mail Publisher’s Legal Costs
Prince Harry and Meghan Markle Reportedly Plan Return to Britain With Their Children
UK Court Ruling Threatens Deportation Plans for Potential Trafficking Victims to Albania
Kemi Badenoch Presses UK Government for Decisions on Rosebank and Jackdaw Oil Fields
UK Foreign Affairs Committee Chair Calls for Ban on Goods from Occupied West Bank
Andy Burnham Government to Place Civil Servants Directly in English Mayoral Offices
Met Office Warns Major El Niño Could Bring Stormier, Wetter Autumn to UK
UK Economy Gains Unexpected Momentum Ahead of Andy Burnham Government’s First Budget
Twenty-Nine US States Take Meta to Trial Over Alleged Child Addiction on Instagram and Facebook
Former Scottish National Party Executive Peter Murrell Jailed for Five Years Over £400,000 Embezzlement
Moderna and Merck's Personalized Cancer Vaccine Succeeds in Historic Late-Stage Melanoma Trial
Prince Harry and Meghan to Move Back to Britain With Their Children
England and Wales Have Fewer Than 1,800 Prison Places Left for Men
Royal Navy to Accelerate DragonFire Laser Deployment Against Growing Drone Threat
Northern Ireland Approves Five Hundred Million Pound Belfast Harbour Expansion
Great British Railways Takes Full Control of Avanti West Coast as Rail Nationalisation Reaches Final Stage
UK AI Safety Institute Calls for Mandatory Security Audits of Advanced AI Models
Scotland Secures Three Billion Pounds for Floating Offshore Wind Hub in Aberdeen
Government Overrides Local Councils to Approve Green Belt Housing Across Southern England
UK and EU Move Toward Mutual Recognition of Food Standards to Ease Cross-Channel Trade
Government Plans Multibillion-Pound Private Healthcare Expansion to Cut NHS Surgical Backlogs
Bank of England Signals Faster Rate Cuts as Inflation Falls Below the Two Percent Target
Suspected People Smuggler Arrested After Investigation Identified Him
Children's Doctors Warn That Vaping Can Lead Young People to Smoking
Hundreds of Thousands of Students Receive GCSE and Vocational Results Across England, Wales and Northern Ireland
Here Is What Can Never Happen in Your Country: Taiwan Is Giving Money to All Its People Because It Collected Too Much Tax
UK Inflation Rises to 2.9% as Energy Bills Jump
UK Issues New Conduct Guide for Asylum Seekers on Consent and Respect
Moderna Shares Surge After Positive Personalized Skin Cancer Trial Results
UK Markets Watch US National Debt Surpass Forty Trillion Dollars
UK Broadcasters Urge Government to Invest in Digital Participation and Broadband
CVC Capital Partners and Standard Life Launch Two Billion Pound Pension Risk Transfer Venture
UK Private Sector Productivity Growth Accelerates in Second Quarter
UK Foreign Secretary Ed Miliband Condemns Israeli E1 Settlement Tender
UK Watchdog Investigates Trainline, Virgin Atlantic and RED Driving School Over Hidden Fees
Prince Harry and Meghan Markle Plan Move to Private Home Outside London
UK Retail Sentiment Improves as Summer Spending Boosts Consumer Confidence
UK Aid Cuts Draw Warnings From Charities Over Humanitarian Consequences
UK Financial Conduct Authority Issues Guidance for Motor Finance Redress Scheme
UK Met Office Launches Aviation Programme to Reduce Climate Impact of Persistent Contrails
Former UK Civil Service Chief Received Record 500,000 Pound Severance Payment
West Midlands to Bring Bus Network Under Public Franchising Model
UK Government Drops Plan to Relax Affordable Housing Requirements After Backlash
UK Reaffirms Military Support for Ukraine Despite Russian Hybrid Warfare Threats
UK Technology Sector Expands Nearly 8 Percent as Digital Industry Outpaces Wider Economy
UK Drought Threatens Harvests Across England and Wales as Food Inflation Risks Persist
UK Government Pledges 442 Million Pounds to End Rough Sleeping by Christmas
UK Government Signals Willingness to Reconsider Digital Services Tax Amid US Tariff Threats
×