One key lesson from the bouts of inflation in the 1970s and 1980s is that core inflation faded only once a loosening in the labour market drove down the job vacancy rate to more normal levels. We estimate that a fall in the job vacancy rate from 3.0% in May to around 2.5% is required to reduce wage growth to the rates of 3.0-3.5% required for core inflation to fall back to 2.0%. That may require interest rates to rise from 5.00% now to 5.50% and to stay at their peak for around a year.
We’ll be discussing the implications of the Bank’s decision for the economy, the housing market and financial markets in a 20-minute online Drop-In at 3pm on Thursday 3rd August. (Register here.)
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