Inflation Report
November 2017

The outlook for the economy

In a nutshell

Prices are rising more quickly than our target

Prices are currently rising at a faster rate than our 2% target.

That's due to the fall in the pound following the Brexit vote.

The value of the pound is still much lower than a couple of years ago.

A lower pound means that things we get from abroad cost more.
And that means higher prices in the shops.

The pound has fallen against other currencies
  • chart Chart: the value of the pound has fallen since the EU referendum, and is much lower than a couple of years ago
    The value of the pound has fallen since the EU referendum

More people are in work

One million more people are in work since 2015.

That means the share of people out of work has fallen to its lowest level since 1975.

More people in work will mean that more people have money to spend. And we're likely to see higher wages as companies compete to get new staff and keep existing workers.

Prices in the shops will also be higher as companies charge more to pay for rising wages.

1 million more people in work since 2015
  • chart Chart: the share of people out of work is at the lowest level since 1975
    the share of people out of work is at the lowest level since 1975

The economy can only grow so fast before it leads to higher inflation

The UK economy grew by just 1.5 per cent over the past year as higher prices from the lower pound reduced the amount people could afford to buy.

That is a lower rate than we saw in most years before the financial crisis which started in 2008.

We think our economy can only grow at a new speed limit of around one-and-a-half per cent a year at the moment before it leads to higher inflation.

Growth now and before the crisis

Growth and inflation

That's because, with so few people out of work, the main thing that drives how quickly our economy can grow is productivity: our ability to produce more with what we have.

Productivity normally rises steadily over time. But over the past decade it has hardly risen at all. That is a big part of why the speed limit of our economy has fallen compared with the past.

 

  • chart Chart: productivity has hardly grown at all since the financial crisis
    Productivity chart
Governor Mark Carney

"With unemployment at a 42-year low, inflation above target and growth just above its new, lower speed limit, the time has come to ease our foot off the accelerator"

Mark Carney, Governor of the Bank of England

The interest rate decision

Inflation is above our 2% target, because of the sharp fall in the pound triggered by the EU referendum. We have to balance how quickly we take inflation back to the target with the support we give to jobs and activity. With more people in work and growth in the economy steady, there are limits to the extent to which we can accept above-target inflation. People need to be able to rely on low and stable inflation. To make sure of that, we need to keep economic growth around its new, lower, speed limit.

To ensure a sustainable return of inflation to the target we have raised interest rates from 0.25% to 0.5%. That means taking our foot a little off the accelerator, reducing slightly the amount of support we are providing to the economy. We expect any further rises to happen at a gradual pace and to a limited extent. Interest rates are likely to remain substantially lower than a decade ago.

Inflation and unemployment