Wealthy Britons’ spending habits make it harder to curb inflation, BoE official says

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The Bank of England is struggling to bring inflation back to target because price rises are increasingly driven by people who are immune to the pressures of higher interest rates, a senior policymaker has said.

Catherine Mann, speaking at a Financial Times event on Wednesday, said there was “a lack of consumer discipline” to rein in businesses’ pricing power in areas of the services sector where prices were often “sticky”, as they reflect conditions in the domestic economy rather than global shocks. 

People on higher incomes, who still had money for discretionary purchases even with higher mortgage costs, were spending “disproportionately” on travel, eating out and entertainment, Mann said.

This meant that services inflation was not falling fast enough to bring inflation back to its 2 per cent target, even though energy prices were easing and goods prices essentially flat. 

“Consumers discipline what firms can price — they can’t pay for it . . . or they choose not to,” she said. “There is not a lot of consumer discipline on a large enough fraction of categories of services to represent active deceleration in services price inflation.”

This was “part of our challenge” on the MPC, as it sought to return inflation sustainably to the BoE’s target using the “single tool” of the benchmark interest rate, she added. 

Mann has long been one of the most hawkish of the MPC’s nine members, voting last month for a further increase in interest rates, while the majority voted to hold them at 5.25 per cent. 

But almost all MPC members say services inflation will need to come down before they feel confident of making a first move to cut interest rates from this 16-year high. 

Services prices were still 6.5 per cent higher than a year earlier in January, even while the headline rate of consumer price inflation held steady at 4 per cent.

Charlie Nunn, chief executive of Lloyds Banking Group, told the same FT Future Forums event that the impact of higher rates on customers had clearly differed “depending on who you are in the economy”.

Households in the bottom 20 per cent by income and wealth were “struggling to make ends meet” and “adapting their spending significantly”. 

But the top 20 per cent, who accounted for the bulk of savings held in the UK, had seen their wealth grow over the past two years, Nunn said — and that was why spending in discretionary areas, such as travel and hospitality, was higher in real terms even than before the pandemic. 

Mann also flagged the continued weakness on the supply side of the UK economy as a constraint on the MPC’s ability to lower interest rates. The bank in February predicted growth in potential supply would average just 1 per cent a year in the coming years, just over half its growth rate before the pandemic. 

Inflation comes when demand exceeds supply, Mann said. “Traditionally central bankers have talked about supply side as the speed limit of the economy. We are limited in our ability to cut interest rates or have a looser monetary policy stance because of constraints on the supply side.”