The Bank of England Governor said that the UK must continue to experience a decline in the price of services from its current level.
Andrew Bailey, speaking after the BoE’s target of 2 percent for consumer price growth was missed, falling to just 1.7 percent in September, said that he saw a “good thing” about the slowing of headline inflation.
He also said that the BoE had not achieved its objectives in terms of services inflation.
Bailey, speaking at the Institute of International Finance’s annual meeting in Washington, said that “disinflation – and the UK was part of it – has taken place faster than expected.”
He added, “we need to see the inflation of services prices come down further”.
According to the Office for National Statistics, the rate of growth in prices for services dropped from 5.6% to 4.9% in September due to lower airfares.
The BoE uses services inflation as a measure of price pressures. Its reading of 4,9% was below the 5,5% forecast by the central banks when they last published a full evaluation of the economy, in August.
After a quarter-point cut in interest rates last summer, the BoE’s willingness to reduce rates both in November and December was fueled by the fall in headline inflation in September to 1.7%.
Bailey said early in this month that if inflation continues to move in the right direction, the bank may be more aggressive about reducing interest rates.
He said on Wednesday that it was still unclear whether a more stubborn growth in domestic prices would slow down the progress toward sustained low inflation.
Bailey stated that the fall in headline inflation was due to favorable movements in energy prices and other commodities. However, it is still important for the growth of services prices to continue “grinding downward”.
He said that there were still questions about whether or not the economy has undergone “structural changes” that could make service inflation “stickier”.
Bailey asked if this “domestic-inflation piece will, in a way, stop us from getting so easily low inflation sustained?”
He said that despite the increase in real incomes in the UK, he saw “caution and anxiety” among households. This was reflected by the high saving rate.
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