Well, Bank of England has tightened, putting up s/t rates by 15bps to 25bps.
They expect inflation to dissipate over time, as supply disruption eased, energy prices stopped rising and global demand rebalanced from goods to services. We'll see. But let's remember, in its November meeting, BOE expected CPI to rise to 'around 5%' by spring 2022. It got there, we now know, in November itself.
The UK's inflation isn't quite as bad as the US - November's 5.1% yoy in the UK vs the US 6.8% - but the likely 12m trajectory looks worse, and the distance between where 10yr rates are now, and where inflation is likely to be in 12m time is worse.
Looking at the UK's likely inflation pattern over the coming 12m: if the deflection against trend we've sen in the last 6m is maintained, we'll see inflation rising to around 6% by March, and staying there or thereabouts until September. Meanwhile, UK 10yr yields are just 0.8% - so there's a gap of about 5.4 percentage points between 3Q22 CPI and bond yields. In the US that gap is 4.3pts, and in the Eurozone 4.8points. So UK bond markets are out there on their own. The BOE needs to keep buying those bonds!
But maybe things won't be that bad: after all, in yoy terms, Brent oil peaked in October up 101% yoy, since when it's fallen about 12%, and the yoy has fallen to 47%. The wider CRB index also peaked in October up 58.3% yoy, since when it is down 5.6% and the yoy has come down to 37%, and even natural gas prices are down 29% from their October peak.
The problem is, even if UK inflation resumes its normal historic patterns, we'll see inflation nearer 5% than 4% for the next nine months; even if we go 1SD below trend, it' ll still be August before we dip back below 4%. In the meantime, BOE has put up rates by 15bps to 25bps. A lot will have to go right, a lot will have to prove 'transient' for that to be the end of tightening.
