Extract A: UK Consumer Prices Index (CPI) and CPIH (CPI including owner occupiers' housing costs), annual % change (quarterly)

Extract B: Headwinds and cost-push factors

Recent economic shocks have triggered a rapid rise in domestic inflation, quickly exceeding the official 2% target. Much of this rise has been driven by global supply chain disruptions, rising wholesale gas prices, and localized shortages of labor in transport and logistics.

With input price inflation rising to its highest rate in years, firms are faces with two choices. In the short term, they can absorb these costs by taking lower profit margins. However, to maintain profitability over the medium term, businesses must eventually pass these costs on to consumers in the form of higher retail prices, unless they can successfully offset rising cost pressures by rapidly improving their labor and capital productivity. Under conditions of tight labor markets, nominal wage demands can spark wage-price spirals if productivity fails to keep pace.

Extract C: The role of structural reforms

Achieving long-term price stability and balanced economic growth requires a policy mix that balances responsible public finances, targeted monetary adjustments, and structural supply-side reforms. While monetary policy remains the principal instrument to dampen excess demand, it cannot directly fix structural supply shortages or improve the underlying efficiency of markets.

Extract C states: 'Active supply-side interventions are crucial for reducing persistent inflationary pressures over the longer term.' If carefully targeted, policies that enhance workforce skills, improve digital and physical infrastructure, and remove regulatory hurdles will expand productive capacity and increase productivity. These interventions help the monetary authorities maintain stability without forcing the economy into a prolonged recession.