Inflation may prove to be more persistent in the UK than other countries, the Bank of England’s chief economist has said.
The Bank had been consistently rising interest rates in an effort to bring double digit inflation down to its 2% target.
While it is expected interest rates will peak at 4.25% in May, Mr Pill’s comments may signal willingness to raise rates higher or for longer if inflation is not responding to upped rates.
The UK’s high gas prices, high employment with high demand but short supply of workers, and supply chain problems has created a “distinctive context that prevails in the UK”, Huw Pill said.
These issues create “the potential for inflation to prove more persistent”, Mr Pill said at an event of the Money Market Association of New York University.
The UK is “distinctive” in facing three economic difficulties at the same time, Mr Pill said.
While energy prices have risen globally – fuelled by Russia’s invasion of Ukraine and the ensuing rush away from Russian gas – the UK and Europe have had “significant adverse terms of trade shock”, he said.
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These include disruptions to natural gas and food supplies and resulted in much higher levels of European wholesale prices, he added.
Another of the problems Mr Pill identified was the need to tackle the inflationary labour market conditions being experienced in the UK and US,
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Finally he said third issue being faced by the UK, which made it distinctive, was weaning off financial supports initiated during the global financial crisis and the pandemic.
Inflation is said to have peaked but remains high.
However, the Bank of England‘s own estimates have inflation forecast to drop from the middle of this year as energy prices come down for businesses and households and the extension of the Energy Price Guarantee until April 2024.
But Mr Pill warned that inflation could become entrenched as the large energy prices experienced by consumers and businesses “trigger the infamous second round effects in price, wage and cost dynamics”.
“The dynamics that threaten to create persistence in inflation even after the original external stimulus abates – is greater when the corporate sector enjoys pricing power, and the labour market is tight.”
