The increasing use of economic tools like tariffs and investment controls for foreign policy goals—termed "economic statecraft"—means negative supply shocks are no longer random. They are now a structural feature of the global economy, making inflation more persistent.
In an era of high uncertainty, central banking has evolved. The focus is no longer on debating precise multi-year forecasts but on risk management through scenario analysis, evaluating how to respond to different potential states of the world.
Reflecting a new economic reality, the Bank of England has abandoned its once-a-year deep dive on the UK's supply side. It now assesses productive capacity constantly, acknowledging that supply shocks are a persistent, not rare, feature of the modern economy.
The Bank of England's Monetary Policy Committee intentionally includes four external members from outside the bank to combat groupthink. These external members are physically separated from the internal staff to ensure diverse perspectives are maintained and prevent collusion.
Post-pandemic, companies have shifted from setting prices on a fixed schedule to "state-dependent pricing." They now adjust prices more frequently in direct response to rising costs, causing inflation to pass through to consumers more quickly and persistently.
The UK economy's weakness stems from both low demand and a constrained supply side. This precarious balance means that even a small uptick in demand could quickly become inflationary, complicating the Bank of England's policy decisions.
Since the pandemic, the influence of global markets on the UK has intensified. Approximately half of the movements in the UK's government bond (gilt) yield curve are now driven by external factors, primarily from the U.S. and Eurozone, up from one-third pre-pandemic.
The threshold at which the UK public actively notices and worries about inflation has decreased. It used to be around 4%, but has now shifted down to a 3-3.5% band, meaning smaller price increases are more likely to influence consumer behavior and wage demands.
Despite the Bank of England's rate-cutting cycle, UK consumer spending isn't increasing as expected. This is because many households are rolling off older, low-rate 2- and 5-year fixed mortgages onto much higher rates, causing their actual debt servicing costs to jump.