Should rising domestic inflationary pressure worry the MPC?

Inflation proved unexpectedly sticky in January, remaining unchanged at 3.0%, contrary to the consensus expectation for it to fall. However, we don’t think that the Monetary Policy Committee (MPC) needs to worry about runaway inflation. Indeed, sterling’s past depreciation remains the main driver of above-target inflation, and domestically-generated cost pressures still look a bit weaker than has been consistent with inflation hitting the 2% target in the past. Nonetheless, with signs that pay growth will continue to accelerate, we continue to expect the MPC to increase Bank Rate by more than investors expect this year.