Extract D: UK Consumer Prices Index (CPI) and Core Inflation, annual % change (quarterly, 2021–2022)

Extract E: Supply shocks and inflationary pressures

The Bank of England notes that UK inflation has risen sharply over the course of 2021 and 2022, moves that have pushed the headline CPI rate significantly above the Government's 2.0% target. This acceleration has been heavily driven by global supply chain disruptions following reopenings, alongside an unprecedented spike in wholesale domestic energy and fuel prices.

Rising input costs have forced firms to adjust. While some businesses initially absorbed cost increases by squeezing profit margins, many have progressively passed these on to consumers in the form of higher retail prices. In response, workers are increasingly demanding higher nominal wages to prevent a drop in their real standard of living. However, without concurrent gains in labour productivity, these wage increases risk creating a self-reinforcing wage-price spiral.

Extract F: Rebuilding productive capacity to anchor inflation

To ensure a stable and sustainable recovery, macro policies must transition from short-term demand expansion towards fostering long-term supply-side improvements. By raising productivity and efficiency, supply-side reforms can help expand the UK's productive capacity, which acts as a structural anchor against persistent inflationary pressures.

Investment in vocational training, deregulation, and targeted tax incentives for business R&D are critical. Enhanced productivity reduces unit labour costs, allowing firms to remain competitive globally without being forced to raise consumer prices. This supply-side expansion makes it far easier for monetary policy to guide inflation back toward target levels without triggering a damaging economic contraction.