If companies raise prices to beat inflation, the result would be more inflation and higher interest rates, the governor of the Bank of England has said.
Andrew Bailey was speaking after the BoE's Monetary Policy Committee (MPC) raised interest rates from 4 per cent to 4.25 per cent, following a surprise jump in inflation last month.
"I would say to people who are setting prices — please understand if we get inflation embedded, interest rates will have to go up further and higher inflation really benefits nobody," Mr Bailey said.
"If all prices try to beat inflation, we will get higher inflation."
The BoE has been steadily increasing interest rates for more than year, as it moves to reduce demand in the UK economy and bring down inflation.
"We think inflation will fall sharply, really from the early summer, throughout the rest of the year," Mr Bailey said.
"We've not got to the point yet where we'll get the sharp fall that we expect. But we've got to see that happen.
"And when determining prices in the economy, it's important to have that in mind."
The bank gave a surprise upgrade to its forecast for the UK economy on Thursday, saying it now expects fractional growth in the second quarter of the year having predicted last month it would decline by 0.4 per cent.
It means the UK would avoid imminently falling into a recession, defined as two consecutive quarters of negative growth.
"The prospects for growth in the economy are now considerable better," Mr Bailey said.
"And I think it is reasonable to say that there is a pretty strong likelihood that we will avoid recession this year. But we've still got to put in place the conditions for much stronger and sustainable growth in the economy."
Retail sales jump
Meanwhile, retail sales showed a surprise jump last month, according to the Office for National Statistics.
Retail sales volumes rose by 1.2 per cent in February, amid strong sales in discount department stores.
Analysts had been predicting a rise of only 0.2 per cent.
But compared the same month last year, sales volumes were 3.5 per cent lower. Also, looking at the broader picture, sales volumes fell by 0.3 per cent in the three months to February 2023 when compared with the previous three months, the ONS said.
"The wider ramifications for stores need to be considered here, the depth of strength on the discount side spells trouble for margins, which are already under serious pressure in the industry," said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
Meanwhile, UK consumers are feeling more confident than they have done in some time.
The GfK Consumer Confidence indicator rose to minus 36 in March, the highest point in a year.
However, while recent sunnier predictions for the economy have lifted the mood of consumers, the number itself remains low, as they continue to face the challenging conditions of the cost-of-living crisis.
