BoE's Mann sees embedded inflation, ready to hike

Key facts

• Inflation has become embedded in the UK economy, according to BoE policymaker Catherine Mann.
• Mann is concerned inflation could reach 4% around the year-end, potentially entrenching price rises through wage negotiations.
• Mann has been part of a minority voting for a quarter-point rate hike to 4% since July.
• Mann is prepared to make an "activist" hike if inflation expectations and price warnings do not improve.
• Mann noted that energy price developments, profit margins, and wage negotiations are critical to determining if cost pressures become embedded.

Inflation running above the Bank of England's 2% target appears to have become embedded in the British economy, BoE policymaker Catherine Mann said on Tuesday.

"We've had inflation well above target for the entire time I've been in my position.... Inflation has become embedded," Mann said at a conference hosted by economic advisors TS Lombard. She added that she was particularly concerned that inflation looked set to hit 4% around the turn of the year, the most common period for employers and workers to negotiate wage increases, potentially further entrenching price rises.

Since July, Mann has been part of a minority on the BoE Monetary Policy Committee voting for a quarter-point rise in interest rates to 4%.

In a speech earlier in July, Mann stated she was prepared to make an "activist" hike if inflation expectations and other price warnings did not improve later that year. She supported holding rates at 3.75% at the time but warned that inflation could become embedded. Mann indicated she would closely monitor data in the second half of the year for rising prices affecting wage settlements and inflation expectations. She noted that energy price developments, profit margin behavior, and wage negotiations would be critical in determining if cost pressures become embedded. Mann also stated that if inflation expectations are unfavorable, an activist move could bring them toward the 2% target. She was in the majority that voted to hold rates the previous month, with the committee splitting 7-2 against a quarter-point hike. Mann has long advocated for responding quickly and aggressively if circumstances change, citing tighter financial conditions in markets as a reason for not voting for a rate rise in June. She also noted that monetary policy needs to tighten more once expectations drift from the 2% target and that demand may be more resilient than aggregate numbers suggest. Mann warned that even if energy prices moderate, firms might seek to rebuild margins by maintaining own-price and wage strategies.