UK inflation will remain not far from the Bank of England's 2% target this year, monetary policy committee member Catherine Mann believes.
Mann made a speech in Leeds and gave an interview to the Financial Times after she voted in last week's MPC meeting for a half-a-percent interest rate cut after being an outspoken hawk for most of her time on the committee.
She changed her mind because "demand conditions are quite a bit weaker than has been the case".
Mann, a professor of economics at Brandeis University in the US and former chief economist at Citibank and the OECD, said this will mean companies will struggle to raise prices this year in the face, as consumers are going to be hit by "non-linear" job losses, putting pressure on spending.
As a result, price increases in 2025 will be consistent with the bank's 2% inflation target, Mann argued.
Her call for a larger rate cut than the 25 basis points favoured by the rest of the MPC was a way to communicate with traders about "what we think are the appropriate financial conditions for the United Kingdom economy".
She said in the speech that in her role as "an activist policy maker", the call for a larger cut was to "cut through the noise" and to "anchor expectations through the inflation hump".
Many companies in the retail, leisure and other sectors with large numbers of employees have insisted that they may have to raise prices in order to protect their profit margins following changes in the government's autumn budget, including increasing National Insurance employer contributions and minimum wages.
Speech details
Mann gives a much more detailed explanation in her speech, which the BoE has published on its website and is more for those who are trained in economics (I have an economics degree but I confess I got 4% in one exam on quantitative methods).
One of the points to note is that she predicts the current weak demand conditions in the labour market are likely to continue and this will lead to a further loosening, ie more job losses, which will stop companies from being able to raise prices as much as they want.
In her words: "I judge that the current and likely continued weak demand conditions will lead to a further loosening of the labor [sic - Mann is American] market which tend to follow non-linear dynamics.
"Thus, even if near-term inflation expectations firm on the back of the inflation hump, these factors likely will restrain pass-through to wages and prevent second-round effects from setting in."
Mann said this inflation hump is more prominent than she and the BoE had projected in November, when she coined the term, but most of it externally generated.
Most of the hump comes from indexed prices such as water bills, phone bills and insurance, which "are not driven by underlying domestic inflationary pressures," Mann said, with those from energy and food prices of greater relevance for monetary policy, contributing about half of the hump, but also "less related to immediate domestically generated price pressures".