The limits of patience

Inflation is picking up again. That gives us fewer reasons to wait, not more.

The energy shock shows no sign of fading. Energy is almost a fifth more expensive than a year ago, firms are paying more, and a weaker exchange rate makes imports more expensive. Food prices are edging higher too.

The longer this lasts, the greater the risk that higher costs spread through the economy.

Demand and the labour market look calmer than in 2021 and 2022. Wages are not chasing prices, and broader price pressures remain contained. That is reassuring, but too early for victory.

Lower energy prices helped inflation return to target earlier this year. Yet underlying inflation never really settled where we would want it. That was our starting point heading into the energy shock. Food prices, so important for households’ perceptions and expectations, have been unusually subdued this year. That is bound to change too.

Inflation rarely spreads all at once. Costs can build before businesses pass them on. Expectations can shift before wider price pressures appear in the data. Waiting for certainty does not necessarily make for good policy.

There is another side to the argument. Growth has held up despite two rate hikes. Fiscal policy is cushioning some immediate price pressure, while also supporting demand in broader sense. Higher borrowing costs also reflect the lack of fiscal prudence.

There’s at bitter mix of risks out there with a potential to dent the resilience of our economy.

The balance is uncomfortable: inflation risks point up, growth risks point down. But weaker growth might not cool inflation on its own. Cost pressures and expectations could prevail.

The real question is whether we have done enough already, and whether price pressures will fade fast enough with only the tightening priced in by markets. I increasingly doubt they will.

Holding rates steady last week was right. Policy tightening is still working through the economy. But last week’s pause was not a finish line.

By December, we will have new forecasts and more information. That will be our next decision point. For me, the question is increasingly not whether further action will be needed, but how much more will be required.

Markets may still underestimate what is required. The issue is not one meeting or one move. It is the path needed to bring inflation back to target and keep it there.

The risks of doing too little are harder to ignore. We should act before high inflation starts to feel normal.

Patience has its place in monetary policy. Hesitation has its price.