Bank of England faces inflation challenge as it prepares to cut rates

The Bank of England is widely expected to cut its key interest rate to 4% from 4.25% on Thursday and to lower it once more before the end of the year, despite consumer price inflation rising to close to double the central bank's 2% target in June. But policymakers are divided over how much underlying price pressures are easing, and on whether a slowing labour market and sputtering growth will make inflation undershoot its target in the medium term if rates are not cut further.     The following graphics set out some of the issues policymakers are likely to discuss before Thursday's decision. GLOBAL CONTEXT AND OUTLOOK British inflation surged more than in the euro zone or the United States after Russia's full-scale invasion of Ukraine in 2022, hitting a peak of 11.1%, partly due to Britain's heavy reliance on natural gas for heating and electricity. Inflation fell sharply in 2023 and bottomed out at 1.7% in September 2024. But since then it has picked up more than in the United States or euro zone and in May the BoE forecast it would not be back to target until early 2027. Inflation rose to 3.6% in June, its highest since January 2024, and some economists think it will soon hit 4%.   By contrast, the European Central Bank expects euro zone inflation to hover just below 2%. Line chart of UK, US and euro zone CPI from since 2022, including forecasts for the UK and euro zone out to 2027 Line chart of UK, US and euro zone CPI from since 2022, including forecasts for the UK and euro zone out to 2027 RISING INFLATION EXPECTATIONS Most BoE officials view surveys of businesses and households' expectations for future inflation as an important guide to future price rises and wage demands, and even of the central bank's credibility. These measures have climbed over the past year. The Citi/YouGov measure of long-term expectations is near its highest since late 2022 - when headline inflation was in double digits - while the BoE's own survey is at its highest since 2019. However, some officials place less weight on these surveys, viewing responses as a reaction to recent inflation rather than a prediction of future behaviour.