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Unit 5 Macroeconomic policy: Inflation and unemployment

5.15 Application: Policy responses to supply shocks—case study of the UK 1950–2023

Follow the steps in Figure 5.23 to learn about the evolution of inflation and unemployment in the UK, and how policymakers responded to supply and demand shocks over the period 1950–2023. The ‘Supplementary figures’ section contains additional charts, which are also linked to in Figure 5.23, to illustrate other macroeconomic variables in the UK over this period.

The line chart illustrates the relationship between inflation and unemployment in the UK from 1953 to 2023. The horizontal axis displays the years from 1953 to 2023, while the vertical axis, with values from −4% to 24%, indicates two values: the CPI inflation rate and the unemployment rate gap relative to the NAIRU. The chart depicts two lines: one tracks the CPI inflation rate, the other line illustrates the unemployment rate gap, measured by the difference between actual unemployment rate and NAIRU. During the 1953–1967 fixed exchange rate era, the unemployment gap stayed close to the neutral rate, with slight peaks around 1960 and 1963, and inflation peaked at 5% in 1955, then fell and levelled at around 3%. In the 1967–1980 period, the flexible exchange rate period, the unemployment gap trended downwards from neutral to about −2%, while inflation saw a steep rise to 22% in 1975, then fell to 8% in 1978, and climbed back to over 15% by 1980. The 1980–1984 recession period shows the unemployment gap increasing from −1% to about 3%, and inflation descending from over 15% to just above 4%. From 1997–2020, a period marked by the Bank of England’s independence and inflation targeting, the unemployment gap was mostly around −1%, with a peak at 2% during 2008–2014, while the CPI inflation rate generally stayed close to the 2% target with a drop to around 0% in 2014. Lastly, between 2021–2023, the chart shows the unemployment rate gap dropping to −1% in 2022 before recovering to 0%, alongside a rise in the CPI inflation rate from about 2% to nearly 10% in 2022, then slightly dropping to around 7% in 2023.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-23

Figure 5.23 Inflation and unemployment in the UK (1950–2023).

Inflation and unemployment in the UK (1950–2023): The line chart illustrates the relationship between inflation and unemployment in the UK from 1953 to 2023. The horizontal axis displays the years from 1953 to 2023, while the vertical axis ranging from −4% to 24% indicates two variables in percentage points: CPI inflation rate and the gap between unemployment rate and NAIRU. The graph features two lines: one represents the CPI inflation rate, and the other depicts the unemployment rate gap. Overall, the trend of the CPI inflation line is variable with noticeable peaks and troughs especially in the 1970s, whereas the unemployment gap line demonstrates a more subdued and steady pattern over the same period.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-23a

Inflation and unemployment in the UK (1950–2023)

Over the period 1953–2023, the UK moved from low inflation to sharp rises in the 1970s, reverting to fairly low and stable inflation, at least until 2022.
The chart also shows the gap between unemployment and the inflation-stabilizing rate, the NAIRU. While the Phillips curve would suggest that inflation should be negatively correlated with this gap, this relationship is often obscured in the data by supply shocks, shifts in policy, and shifts in inflation expectations.
By examining sub-periods, we can, however, relate the data to our models, and we can trace out the contrast between supply and demand shocks.

Note: According to the Phillips curve model, when the series for the unemployment rate minus the NAIRU is positive, inflation should be falling and vice versa.

Inflation and unemployment in the UK (1953–1967): The line chart illustrates the relationship between inflation and unemployment in the UK from 1953 to 2023. The horizontal axis displays the years from 1953 to 2023, while the vertical axis ranging from −4% to 24% indicates two variables in percentage points: CPI inflation rate and the gap between unemployment rate and NAIRU. The graph features two lines: one represents the CPI inflation rate, and the other depicts the unemployment rate gap. This chart specifically scrutinizes the period from 1953 to 1967, when the UK maintained a fixed exchange rate. During this time, the unemployment rate gap displays a relatively stable pattern, mostly hovering around a neutral rate, with slight increases noticeable around 1960 and 1963, before a modest decline to −1% following these peaks. In contrast, the inflation trend is more dynamic, with a notable high of 5% in 1955, which sharply falls to just above 0% by 1960. Subsequently, inflation sees a moderate rise, stabilizing at about 3% towards the end of the observed period.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-23b

Inflation and unemployment in the UK (1953–1967)

In this period, the UK had a fixed exchange rate, with fairly stable and low inflation. There was some evidence of rises in inflation when unemployment fell below the NAIRU.

Inflation and unemployment in the UK (1967–1980): The line chart illustrates the relationship between inflation and unemployment in the UK from 1953 to 2023. The horizontal axis displays the years from 1953 to 2023, while the vertical axis ranging from −4% to 24% indicates two variables in percentage points: CPI inflation rate and the gap between unemployment rate and NAIRU. The graph features two lines: one represents the CPI inflation rate, and the other depicts the unemployment rate gap. This chart specifically scrutinizes the period from 1967 to 1980, when the UK maintained a flexible exchange rate and no clear inflation target. The unemployment rate, measured relative to the NAIRU, shows an overall downtrend from a neutral position in 1967 to about −2% by 1979, despite a brief uptick around 1970 and a modest recovery in 1980. CPI inflation, on the other hand, illustrates more pronounced fluctuations, ascending from 3% in 1967 to a high of 22% around 1975. It then decreases significantly to 8% in 1978 before rising again to just over 15% by the end of this period.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-23c

Inflation and unemployment in the UK (1967–1980)

The UK progressively moved towards a flexible exchange rate, with regular depreciations (Figure 5.24). Monetary policy was directly controlled by the UK government, with no clear target inflation rate.
Sustained real rises in oil prices in the 1970s (Figure 5.25) acted as a negative supply shock, depressing real wage growth, and pushing up the inflation rate. But there was no attempt to offset this with tighter monetary policy: real interest rates were often negative (Figure 5.26), and unemployment actually fell below the NAIRU (which was itself increasing) (Figure 5.27).
As a result, the Phillips curve shifted up significantly as inflation expectations adjusted.

Inflation and unemployment in the UK (1980–1984): The line chart illustrates the relationship between inflation and unemployment in the UK from 1953 to 2023. The horizontal axis displays the years from 1953 to 2023, while the vertical axis ranging from −4% to 24% indicates two variables in percentage points: CPI inflation rate and the gap between unemployment rate and NAIRU. The graph features two lines: one represents the CPI inflation rate, and the other depicts the unemployment rate gap. This line chart focuses on the period from 1980 to 1984, a time of economic recession in the UK. The unemployment rate gap relative to the NAIRU exhibits an upward trend starting from −1% in 1980, increasing to about 3% by 1984. The CPI inflation trajectory shows a steep decline within this period, falling sharply from over 15% in 1980 to slightly above 4% by 1984.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-23d

Inflation and unemployment in the UK (1980–1984)

During this period (discussed earlier in Figure 5.12), there was a sharp fiscal and monetary contraction, with real interest rates strongly positive for a sustained period (Figure 5.28), accompanied by a significant real exchange rate appreciation (Figure 5.29). This caused a significant recession with a large increase in unemployment above the NAIRU (Figure 5.30).
As a result, there were significant falls in inflation (with falling import prices making a big difference), but with very large costs to the economy, since inflation expectations had become embedded. As inflation fell, the Phillips curve progressively shifted back downwards.

Inflation and unemployment in the UK (1997–2020): The line chart illustrates the relationship between inflation and unemployment in the UK from 1953 to 2023. The horizontal axis displays the years from 1953 to 2023, while the vertical axis ranging from −4% to 24% indicates two variables in percentage points: CPI inflation rate and the gap between unemployment rate and NAIRU. The graph features two lines: one represents the CPI inflation rate, and the other depicts the unemployment rate gap. This line chart specifically analyses the period from 1997 to 2020, during which the Bank of England started to operate independently with an inflation targeting regime. The unemployment rate, relative to the NAIRU, mostly hovers around −1%, with the exception of a noticeable increase to a peak of 2% between 2008 and 2014. The CPI inflation rate predominantly tracks close to the Bank’s target of 2%, with some deviations — particularly in the late 2000s and early 2010s where it experienced slight elevations, and a notable dip to its lowest point at around 0% in 2014.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-23e

Inflation and unemployment in the UK (1997–2020)

The Bank of England was given independent control of monetary policy, and followed an inflation targeting regime with a target of 2%.
Actual inflation mostly stayed close to target, with increasing evidence of anchoring of expectations.

Monetary policy during the global financial crisis: The line chart illustrates the relationship between inflation and unemployment in the UK from 1953 to 2023. The horizontal axis displays the years from 1953 to 2023, while the vertical axis ranging from −4% to 24% indicates two variables in percentage points: CPI inflation rate and the gap between unemployment rate and NAIRU. The graph features two lines: one represents the CPI inflation rate, and the other depicts the unemployment rate gap. The line chart focuses on the period from 2007 to 2023, encapsulating the global financial crisis and its extended effects on UK monetary policy. The unemployment rate gap escalates to a peak of approximately 2% during the years of 2008 to 2014, and then descends to about −2% in 2021, eventually leveling out to 0% by the end of 2023. The CPI inflation rate initially hovers near the Bank of England’s target rate of 2%, dipping to a trough of around 0% in 2014, which marks its lowest point in this interval. As the 2020s commence, the inflation rate undergoes a significant rise, peaking close to 10% in 2022, before moderating slightly to around 7% in 2023.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-23f

Monetary policy during the global financial crisis

The Bank of England judged that the global financial crisis of 2007–2009 was a demand shock. It rapidly relaxed monetary policy, cutting nominal interest rates close to zero, so real rates were negative (Figure 5.31), with a sharp depreciation (Figure 5.32). This helped stabilize the economy, and limit the impact on unemployment, but at the cost of a temporary rise in inflation. However, inflation reverted to target fairly quickly.

Inflation and unemployment in the UK (2021–2023): The line chart illustrates the relationship between inflation and unemployment in the UK from 1953 to 2023. The horizontal axis displays the years from 1953 to 2023, while the vertical axis ranging from −4% to 24% indicates two variables in percentage points: CPI inflation rate and the gap between unemployment rate and NAIRU. The graph features two lines: one represents the CPI inflation rate, and the other depicts the unemployment rate gap. This line chart specifically analyses the period from 2021 to 2023, a period marked by the Russian invasion of Ukraine, which led to a significant shortage of natural gas in Europe. The line representing the unemployment rate gap, decreases from a neutral position in 2021 to −1% in 2022, before it rebounds to 0% in 2023. Concurrently, the CPI inflation rate depicts a striking escalation from about 2% to nearly 10% in 2022, followed by a moderate reduction to approximately 7% in 2023.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-23g

Inflation and unemployment in the UK (2021–2023)

The Russian invasion of Ukraine caused a temporary shortage of natural gas in Europe. The resulting large increases in the price of gas (Figure 5.33), petrol, and electricity caused a sharp increase in inflation, and a significant cut in real wages as discussed in Section 4.11. As such, this was the first major negative supply shock since the 1970s, and the first real test of the inflation targeting regime. The Bank of England responded by raising nominal interest rates, but by less than the increase in inflation, so real interest rates initially fell (Figure 5.34). Many commentators felt that this response was inadequate, and risked inflation expectations shifting upwards again. But the Bank of England appears to have been relying on several factors that made this supply shock different from the 1970s:
• The significant cuts in real incomes were expected to weaken aggregate demand, even without a monetary tightening.
• While the rises in real oil prices in the 1970s were sustained, it was expected that the rises in gas prices in 2020 would rapidly unwind, since there was no evidence of a sustained shortage. As discussed in Section 4.11, the negative terms-of-trade shock was reversed. Gas prices did indeed fall back rapidly (Figure 5.33), helping to bring inflation back down.
• Evidence from financial markets showed that longer-term inflation expectations had not significantly shifted upwards (Figure 5.35).
By the end of 2023, the Bank of England appeared confident that inflation would return close to target. As inflation fell, real interest rates progressively rose (Figure 5.34).

Exercise 5.12 The UK’s policy responses (1950–2023)

Using the models discussed in this unit and the information in Figure 5.23, draw appropriate diagrams to explain the macroeconomic changes in the UK over the following periods:

  • 1967–1980: flexible exchange rate with no clear inflation target
  • 1980–1984: fiscal and monetary contraction
  • 1997–2007: Bank of England given control over monetary policy
  • 2007–2009: global financial crisis
  • 2020–2023: COVID-19 pandemic and the Russia–Ukraine war

Supplementary figures Figures 5.24–5.35

This box contains Figures 5.24 to 5.35, which accompany Figure 5.23.

The line chart portrays the evolution of the GBP/USD exchange rate from 1953 to 2023. The horizontal axis displays years from 1953 to 2023, and the vertical axis scales from 0.5 to 4.0, depicting the exchange rate indexed to 1 in the base year of 1953. Two lines are depicted to indicate the nominal and real exchange rates over time. The nominal line, positioned above the real, ascends from a value of 1 in 1953 to just over 2 in 2023. The real exchange rate, after decreasing, fluctuates around 0.75, then rebounds above 1 post-2014. Three key annotations highlight critical phases within the time period from 1967 to 1977. Firstly, in 1967, the GBP depreciated within the fixed exchange rate regime, where the nominal exchange rate with a value greater than 1 indicates that a dollar cost more in pounds and vice versa. Secondly, after 1971, the UK had a floating exchange rate regime and the nominal exchange rate depreciated rapidly until 1977. Lastly, despite the nominal terms surpassing 1, the UK inflation was also significantly higher than US inflation, so in real terms the GDP appreciated, worsening competitiveness.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-24

Figure 5.24 The GBP/USD exchange rate (normalized to equal 1 in 1953).

This line chart illustrates how the real oil prices spiked in the 1970s. The horizontal axis displays years from 1953 to 2023, and the vertical axis scales from 0.5 to 8.0, depicting the real oil price in sterling, indexed to 1 in the base year of 1953. The depicted line reveals a trend of increasing real oil prices, punctuated by significant volatility throughout the entire timeline. It is highlighted that during the 1970s, the real oil prices begin at around 0.7, surges to nearly 3.0 in 1973, plateaus for approximately two years, and then climbed sharply to a peak of just above 4.0 in 1979, marking the decade as a period of intense fluctuations in oil prices.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-25

Figure 5.25 Real oil prices spiked in the 1970s.

The line chart displays the relationship among CPI inflation, policy rate and 3-month interest rate in the UK from 1960 to 2023. The horizontal axis displays years from 1960 to 2025, and the vertical axis scaling from 0 to 30% shows two measures: interest rate and inflation, both measured in percentages. There are 3 lines depicted in the graph, which are UK CPI inflation, UK policy rate and UK 3-month interest rate (bank rate) respectively. The highlighted period from 1967 to 1980 shows both the inflation rate and policy rate on an upward trajectory, with the inflation rate exhibiting greater volatility. Before and in the early stages of the 1970s, the inflation rate is consistently below the policy rate. In around 1972, the inflation rate spikes to over 10%, exceeding the policy rate for approximately two years. Thereafter, they converge for a brief period. In 1975, the inflation rate soars once more to over 25%, surpassing the policy rate for the remainder of this timeframe. The real interest rates, derived from the difference between the policy rate and CPI inflation, are predominantly negative during these years.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-26

Figure 5.26 1967–1980: Real interest rates (the difference between the Bank of England policy rate and the consumer price index) were mostly negative.

The line chart illustrates the variation in unemployment rates in the UK from 1953 to 2023. The horizontal axis displays the years from 1953 to 2023, and the vertical axis scaling from 0 to 12% measures the unemployment rate in percentages. There are 3 lines depicted in the graph, which are unemployment rate, NAIRU, and the moving average of actual unemployment respectively. During this emphasized period from 1967 to 1980, the actual unemployment rate climbs from just under 3% to about 7%, while NAIRU, which begins around 4.5% in 1970, meets the actual unemployment rate at approximately 7% in 1980. It suggests that, throughout this period, the actual unemployment rate is mostly below NAIRU but with decreasing gaps. The line representing the moving average of actual unemployment increases more steadily from just under 3% to 7% in 1980.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-27

Figure 5.27 1967–1980: Unemployment fell below the NAIRU.

The line chart displays the relationship among CPI inflation, policy rate and 3-month interest rate in the UK from 1960 to 2023. The horizontal axis displays years from 1960 to 2025, and the vertical axis scaling from 0 to 30% shows two measures: interest rate and inflation, both measured in percentages. There are 3 lines depicted in the graph, which are UK CPI inflation, UK policy rate and UK 3-month interest rate (bank rate) respectively. During this emphasized span of 1977 to 1984, the line chart reveals significant fluctuations in both the UK CPI inflation rate and policy rate. Initially, the two rates decline in tandem from 1975 to 1979, with the inflation rate slightly exceeding the policy rate. This convergence is followed by a pronounced peak in 1980, after which both rates recede. From 1981 onwards, the policy rate’s descent moderates relative to the inflation rate that continues to drop more sharply, leading to the policy rate reaching a low of 8% and inflation approximately 5% by 1984. This divergence results in a widening gap, indicative of a prolonged phase of positive real interest rates.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-28

Figure 5.28 1977–1984: Real interest rates (the difference between the Bank of England policy rate and the consumer price index) were positive for a sustained period.

The line chart portrays the evolution of the GBP/USD exchange rate from 1953 to 2023. The horizontal axis displays years from 1953 to 2023, and the vertical axis scales from 0.5 to 4.0, depicting the exchange rate indexed to 1 in the base year of 1953. Two lines are depicted to indicate the nominal and real exchange rates over time. The nominal line, positioned above the real, ascends from a value of 1 in 1953 to just over 2 in 2023. The real exchange rate, after decreasing, fluctuates around 0.75, then rebounds above 1 post-2014. It is noted that, between the highlighted period between 1977 and 1980, the sterling appreciated in both nominal and real terms, significantly depressing the real economy, but lowering import prices, which in due course helped bring inflation down. This is reflected by the decreases in both the nominal and real exchange rates during this period.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-29

Figure 5.29 1977–1980: The real exchange rate appreciated significantly.

The line chart illustrates the variation in unemployment rates in the UK from 1953 to 2023. The horizontal axis displays the years from 1953 to 2023, and the vertical axis scaling from 0 to 12% measures the unemployment rate in percentages. There are 3 lines depicted in the graph, which are unemployment rate, NAIRU, and the moving average of actual unemployment respectively. During this highlighted period from 1980 to 1984, the actual unemployment rate sharply escalates from around 5% to a peak of almost 12% in 1984. The NAIRU line also ascends but at a more moderate pace, starting at 7% and rising to 10% by 1984. Consequently, the actual unemployment rate overtakes NAIRU early in this period. The moving average of unemployment exhibits the most gradual increase, rising to just above 9% by 1984, thereby remaining the lowest among the three indicators by the end of this period.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-30

Figure 5.30 1980–1984: A significant increase in unemployment above the NAIRU.

The line chart displays the relationship among CPI inflation, policy rate and 3-month interest rate in the UK from 1960 to 2023. The horizontal axis displays years from 1960 to 2025, and the vertical axis scaling from 0 to 30% shows two measures: interest rate and inflation, both measured in percentages. There are 3 lines depicted in the graph, which are UK CPI inflation, UK policy rate and UK 3-month interest rate (bank rate) respectively. The line chart delineates the UK CPI inflation rate, policy rate, and 3-month interest rate (interbank rate) from 1991 to 2019. Throughout this period, the 3-month interest rate closely shadows the policy rate, remaining marginally higher. From 1991 to 2007, all three indicators follow a downward trend; the policy rate and 3-month rate decline from around 15% to slightly above 5%, and the inflation rate drops from 8% to about 2%. It is highlighted in the graph that, during this time as the first stage of the inflation targeting periods, real interest rates, as measured by the gap between policy rate and inflation rate, are strongly positive. It is also noted that, from 2007 onwards, the GFC leads to a reduction in the nominal policy rate close to zero, implying strongly negative real interest rates. This is captured by the steep descent of both the policy rate and the 3-month interest rate from about 6% to just above zero in 2008, with both rates staying at this depressed level up to 2019. Meanwhile, inflation experiences an initial spike from 3% to 5% in 2008, followed by substantial fluctuations around 2% for the remainder of the period observed.
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Figure 5.31 1991–2019: Real interest rates (the difference between the Bank of England policy rate and the consumer price index) changed from positive to negative due to the global financial crisis.

The line chart portrays the evolution of the GBP/USD exchange rate from 1953 to 2023. The horizontal axis displays years from 1953 to 2023, and the vertical axis scales from 0.5 to 4.0, depicting the exchange rate indexed to 1 in the base year of 1953. Two lines are depicted to indicate the nominal and real exchange rates over time. The nominal line, positioned above the real, ascends from a value of 1 in 1953 to just over 2 in 2023. The real exchange rate, after decreasing, fluctuates around 0.75, then rebounds above 1 post-2014. It is noted that, during 2008, both nominal and real exchange rates depreciated by around 25%. This is reflected by the increases in both the nominal and real exchange rates from 2007 to 2008.
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-32

Figure 5.32 2007–2008: A sharp depreciation in the exchange rate.

The line chart illustrates the escalation in gas prices from 2021 to 2024. The horizontal axis displays years from 2021 to 2024, while the vertical axis measures gas prices, ranging from 0 to 600 per therm in GBP. The line capturing the gas prices shows a pronounced surge in gas prices from about £50 in early 2021 to a peak nearing £600 in late 2022. Annotations on the chart indicate that such rise in gas prices by 2022, by nearly 10 times at the peak, caused rises in heating bills but also impacted costs for most other goods and services, cutting real wages significantly. Following its peak, the price line shows a swift decline to approximately £80 in early 2024. The chart emphasizes that, in contrast to the rise in real oil prices in the 1970s, the price rise was expected to (and did) reverse quite rapidly, since the shortage was only temporary, citing ‘The world has proven reserves equivalent to 52.3 times its annual consumption.’
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https://www.core-econ.org/macroeconomics/05-macroeconomic-policy-15-uk-case-study-1950-2023.html#figure-5-33

Figure 5.33 2021–2023: Gas prices increase due to the Russia–Ukraine war.

Wholesale market indicators, Ofgem.

The line chart displays the relationship among CPI inflation, policy rate and 3-month interest rate in the UK from 1960 to 2023. The horizontal axis displays years from 1960 to 2025, and the vertical axis scaling from 0 to 30% shows two measures: interest rate and inflation, both measured in percentages. There are 3 lines depicted in the graph, which are UK CPI inflation, UK policy rate and UK 3-month interest rate (bank rate) respectively. The focused period from 2020 to 2023 in the line chart shows a significant decrease in real interest rates, as indicated by the narrowing gap between the 3-month interest rate and the inflation rate. Inflation experiences a dramatic rise from approximately 1% in 2020 to nearly 10% in 2022, followed by a decrease to around 4% by the end of 2023. Concurrently, the 3-month interest rate shows a steady ascent from just above zero in 2020 to over 5% in 2023. This movement results in a diminishing gap between the two rates during this period.
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Figure 5.34 2020–2023: Real interest rates (the difference between the Bank of England policy rate and the consumer price index) fell.

The line chart presents the implied Consumer Price Index (CPI) inflation rate for the UK. The horizontal axis ranging from 1 to 10 extends from the present year over the next ten years, and the vertical axis displays the implied CPI inflation rate in percentages based on swap data from October 2022. Initially, the graph depicts a steep decline from around 7% in the first year to below 3% in the second year. After this drop, the inflation expectation rate stabilizes and exhibits minor fluctuations around the 2% mark for the remaining years. This trend suggests that inflation expectations did not significantly increase over the long term.
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Figure 5.35 2022: Inflation expectations did not significantly shift upwards.