The MPC has not surprisingly emphasised the importance of inflation expectations in determining the degree to which it is prepared to tolerate an overshoot of the inflation target. After all, low inflation expectations appear to have helped to keep wage and price pressures subdued in recent years. However, inflation expectations also appear to be correlated with past rates of actual inflation. So a rise in inflation expectations might be a lagging rather than a leading indicator of actual inflation. As such, the MPC would be wise to look for firmer signs of a more sustained rise in inflation, such as increasing wage costs, before concluding that it needs to act.
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