BoE’s Greene Warns Second-Round Effects of Energy Price Shock Could Lag by a Year

Bank of England policymaker Megan Greene has cautioned that the second-round effects from the energy price shock may not fully materialize in the UK economy for another year, challenging assumptions about the near-term inflation trajectory. Speaking in a recent engagement, Greene highlighted the lag between the initial energy price spike and its downstream impact on wages and domestic pricing decisions.

The Lag Between Energy Shocks and Inflation

Greene’s remarks point to a critical but often underestimated dynamic in inflation forecasting. While headline energy prices have moderated from their 2022 peaks, the Bank’s external member argues that the transmission mechanism to core inflation — particularly through wage negotiations and corporate pricing strategies — operates on a delayed timeline. This means the full extent of the shock’s second-round effects may still be ahead of us, even as official inflation figures show signs of easing.

Implications for Monetary Policy

The warning carries direct implications for the Bank of England’s interest rate path. If second-round effects are indeed deferred, the Monetary Policy Committee (MPC) may need to maintain a tighter stance for longer than markets currently price in. Greene’s perspective aligns with the view that the ‘last mile’ of inflation control is the most stubborn, requiring sustained vigilance rather than premature easing. Markets have been pricing in rate cuts as early as mid-2025, but Greene’s timeline suggests underlying price pressures could persist into 2026.

What This Means for Households and Businesses

For households, the lag means that the cost-of-living squeeze may not fully abate even as energy bills fall. Businesses, particularly in energy-intensive sectors, may continue to face elevated input costs and wage demands as workers seek compensation for past inflation. The Bank’s own forecasts show wage growth remaining above pre-pandemic averages, a key metric Greene is likely monitoring closely.

Conclusion

Megan Greene’s assessment adds a sobering note to the debate on UK inflation. While energy prices have retreated from crisis levels, the second-round effects — in wages, services inflation, and corporate margins — may take another year to fully unfold. For the Bank of England, this argues for patience and a data-dependent approach, even as political pressure mounts for rate relief. Investors and households should prepare for a longer adjustment period than headline inflation numbers might suggest.

FAQs

Q1: What are second-round effects in the context of inflation?
Second-round effects occur when an initial price shock — such as a surge in energy costs — feeds through to wages, other input costs, and broader pricing decisions across the economy, creating persistent inflation beyond the original trigger.

Q2: Why does Megan Greene believe the effects are delayed by a year?
Greene argues that the transmission mechanism from energy prices to wages and corporate pricing takes time — often 12 to 18 months — because wage negotiations, contract renewals, and pricing strategies adjust slowly to the initial shock.

Q3: How might this affect Bank of England interest rate decisions?
If second-round effects are still emerging, the MPC may delay rate cuts or maintain higher rates for longer to ensure inflation is sustainably under control, contrary to market expectations of early easing.