At a Deutsche Bank event on Monday, Alan Taylor, a member of the Bank of England ank of England ank of England Monetary Policy Committee, raised concerns about the trajectory of services inflation, noting that recent months have shown a slower decline than policymakers had anticipated.
Taylor, regarded as one of the more dovish voices on the committee, said the services Consumer Price Index has not fallen as far or as rapidly as hoped. He reiterated his expectation that the measure will normalise over time as wage growth eases.
Official figures show services inflation eased to 4.4% in January from 4.5% previously. Despite this modest slowdown, the pace remains elevated and has been a central focus for the Bank of England throughout its rate-cutting cycle.
Labour market and wages
Taylor observed signs of weakness in the labour market, describing the slowdown as broadly aligned with more pessimistic forecasts. He pointed to wage growth moderating to 4.2% in the latest data, while noting that this rate still sits above levels policymakers consider consistent with a durable return of inflation to the 2% target.
Given this dynamic, Taylor said he now sees a risk that inflation could undershoot the Bank ank of England ank of England ank of England ank of England ank of England ank of England ank of England's 2% target. At the same time, he warned that if expected improvements in productivity fail to materialise, that outcome would also present a downside risk to the central bank's forecasts.
Outlook and implications
Taylor expressed confidence that inflation will be close to the 2% goal on a sustainable basis, while underscoring the uncertainties that remain. His comments highlighted two competing risks: the possibility of inflation falling short of target if demand softens more than anticipated, and the possibility that stagnant productivity could keep inflationary pressures higher for longer.
For policymakers, these observations underscore the delicate balance between wage dynamics, labour market conditions, and productivity trends in shaping the inflation outlook. For markets and businesses, the pace of services inflation and the evolution of wages will be key variables to monitor as the Bank of England proceeds through its policy cycle.