Megan Greene: Inflation remains above target, geopolitical events exacerbate economic challenges, and the UK faces weak growth amid supply-side issues

Key takeaways

Inflation has not returned to target levels in many countries, prompting the start of a rate hike cycle.
The interaction between monetary policy and external shocks, such as geopolitical events, is crucial for understanding inflation.
International economic conditions significantly influence the UK economy, particularly through financial markets.
The UK economy is experiencing weak growth due to both demand and supply-side issues.
Weak supply-side conditions could lead to inflation if demand increases.
The UK economy’s inflationary environment is influenced by weak supply-side factors and historical inflation trends.
Wage growth expectations are stalling and are projected to drop slightly, indicating a potential slowdown in disinflation.
Inflation persistence is a significant concern due to repeated negative supply shocks.
Households and businesses are becoming more sensitive to inflation as it approaches certain thresholds.
The shift to state-dependent pricing by firms is a significant change in how prices are set in response to inflation.
Supply-side weaknesses and historical inflation trends are key factors affecting current economic conditions in the UK.
Geopolitical events like the war in Iran have a direct impact on inflation and economic policy.
The UK economy’s weak growth is a result of both demand and supply-side challenges.
The persistence of inflation is a critical issue, exacerbated by external shocks.
State-dependent pricing strategies reflect a significant shift in economic behavior due to inflation.

Guest intro

Megan Greene is an external member of the Monetary Policy Committee at the Bank of England, where she has served since July 2023. Previously, she was Global Chief Economist at Kroll and a regular columnist at the Financial Times covering global macroeconomics and policy. Greene holds a bachelor’s degree in political economy from Princeton University and a master’s degree in international relations from Oxford University.

The impact of post-COVID inflation

Inflation has not returned to target in many countries, and the rate hike cycle has begun.

We are still in the wake of the incredible inflation wave that we had post-COVID.

— Megan Greene

Understanding the current global economic landscape is crucial for addressing post-COVID inflation.
The ongoing inflation situation has significant implications for monetary policy.

In some countries, the rate hike cycle has begun.

— Megan Greene

Post-COVID inflation continues to challenge economic recovery efforts.
The persistence of inflation is a major concern for policymakers.

Inflation has not returned to target in many countries.

— Megan Greene

The interaction between monetary policy and external shocks is crucial for understanding inflation.
Geopolitical events like the war in Iran impact inflation rates.

What does the price in oil and so forth mean for inflation?

— Megan Greene

International influences on the UK economy

International economic conditions significantly influence the UK economy.

Before the pandemic, when the gilt yield curve moved, about a third of that move was usually from outside the UK.

— Megan Greene

The relationship between UK financial markets and international conditions is critical.

Since the pandemic, it’s been about half of the moves in our yield curve.

— Megan Greene

Understanding external factors is essential for monetary policy decisions.
The US and Eurozone have a significant impact on the UK economy.

Mostly from the US and also the Eurozone.

— Megan Greene

International influences are more pronounced since the pandemic.

Weak growth in the UK economy

The UK economy is experiencing weak growth due to demand and supply-side issues.

The UK economy has been pretty weak… demand is pretty weak in the UK.

— Megan Greene

Supply-side weaknesses contribute to the UK’s economic challenges.

Underlying GDP… is pretty weak, you know, point 2% growth per quarter.

— Megan Greene

Weak supply-side conditions could lead to inflation if demand increases.

If you had more demand than that, that could actually end up becoming inflationary.

— Megan Greene

The dual challenges of demand and supply affect the UK’s economic performance.
Understanding the factors affecting growth is crucial for economic recovery.

Inflation and supply-side factors in the UK

The UK economy’s inflationary environment is influenced by weak supply-side factors.

Part of that story is the supply side which is also incredibly weak.

— Megan Greene

Historical inflation trends impact current economic conditions in the UK.

We’ve had inflation above target for the best part of five years now in the UK.

— Megan Greene

Wage growth expectations are stalling, indicating a potential slowdown in disinflation.

Pay settlement growth was due to come in a bit lower than it was last year.

— Megan Greene

The interplay between supply-side issues and historical inflation data is critical.
Forward-looking indicators for wages and prices are stalling.

Concerns about inflation persistence

Inflation persistence is a significant concern due to repeated negative supply shocks.

I was already worried about some of this inflation persistence.

— Megan Greene

Geopolitical events exacerbate inflation persistence.

Even before Iran was invaded.

— Megan Greene

Understanding the impact of external shocks is critical for economic forecasting.
Households and businesses are becoming more sensitive to inflation.

Households and businesses are possibly just more attentive to inflation.

— Megan Greene

Inflation thresholds affect consumer and business behavior.

State-dependent pricing strategies

The shift to state-dependent pricing by firms is a significant change.

Firms… have shifted much more to state-dependent pricing.

— Megan Greene

Pricing strategies in inflationary environments are evolving.

When inflation gets higher, they set prices more often.

— Megan Greene

Firms pass through higher costs to end users in response to inflation.
Understanding pricing strategies is vital for inflation management.
The shift reflects a critical change in economic behavior.

Geopolitical events and economic policy

Geopolitical events like the war in Iran impact inflation and economic policy.

What does the price in oil and so forth mean for inflation?

— Megan Greene

External shocks have direct implications for monetary policy.
Policymakers must consider geopolitical tensions in economic decisions.
The interaction between geopolitical events and inflation is complex.
Understanding these dynamics is crucial for effective policy-making.
Geopolitical risks add uncertainty to economic forecasts.

Wage growth trends and inflation

Wage growth expectations are stalling, indicating a potential slowdown in disinflation.

What they thought about wages a year ahead where they thought they were gonna drop a little bit.

— Megan Greene

Wage growth trends have implications for inflation and economic policy.

Pay settlement growth was due to come in a bit lower than it was last year.

— Megan Greene

Understanding wage growth is critical for inflation management.
Wage growth expectations influence economic policy decisions.
The slowdown in disinflation is linked to wage growth trends.

The role of supply-side weaknesses

The UK economy’s inflationary environment is influenced by weak supply-side factors.

Part of that story is the supply side which is also incredibly weak.

— Megan Greene

Supply-side weaknesses contribute to inflationary pressures.
Historical inflation trends impact current economic conditions in the UK.

We’ve had inflation above target for the best part of five years now in the UK.

— Megan Greene

The interplay between supply-side issues and historical inflation data is critical.
Understanding supply-side weaknesses is crucial for economic recovery.