A member of the Bank of England’s Monetary Policy Committee believes “we are not there yet” on inflation when it comes to consumer behaviour.
Catherine Mann is one of the members of the committee responsible for setting interest rates.
In a speech, published on Thursday (October 9), she said consumption makes up two-thirds of GDP and explained the “consumption gap”.
She said this is the “persistent” deviation of real consumption volumes from trend growth.
Bank of England must ‘assess consequences’ of private markets
Mann said: “If the consumption gap was my only concern, reducing the restrictiveness of monetary policy would be appropriate.
“However, in light of elevated inflation and expectations, maintaining restrictiveness for longer would be appropriate.
“In determining the balance between the downside risks to consumption and the clear upside evidence on inflation, the key issue is whether high inflation itself plays a role in the consumption gap.”
She said though inflation has fallen closer to the 2 per cent target, consumers will not necessarily see this reflected in their day-to-day lives.
Mann said: “It is perhaps counterintuitive that in order to create an environment conducive to growth, monetary policy must remain restrictive for longer.
“But this is necessary to bring inflation sustainably back to our 2 per cent target in the medium term.
“My former boss Alan Greenspan (I started my career at the Federal Reserve Board) said it succinctly: ‘We will be at price stability when households and businesses need not factor expectations of changes in the average level of prices into their decisions.’
“The evidence from consumer behaviour is that we are not there yet.”
tara.o’connor@ft.com
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