Rapid price rises for consumer goods are unlikely to last, but UK rate setters will have to watch out for signs of wages increasing at a pace that could lead to more persistent inflation, a senior Bank of England official said on Thursday.
Ben Broadbent, deputy governor for monetary policy, acknowledged that the extent of the rise in UK inflation was hard to explain. Averaged over the past 18 months, it has been only slightly lower than before the pandemic, even though gross domestic product is still well below its pre-crisis level.
There was a good case to argue that some of the contributing factors would be temporary, he said. In particular, the global surge in goods price inflation should slacken as consumers switch back to spending on services and supply bottlenecks ease.
Even though inflation is likely to rise further in the coming months, the appropriate policy response “could well be ‘nothing’ . . . if this was only a story about global goods prices”, he argued.
But he warned that policymakers would have to “pay very close attention . . . to the numbers in the labour market”, because inflationary pressures in the domestic economy could be more persistent. Labour shortages should lessen as the furlough scheme came to an end, but there could still be a mismatch between the jobs and workers available in particular places, resulting in companies paying higher wages.
“We can’t all become IT experts overnight. Nor could one easily dismantle an office or restaurant in a city centre and transplant it elsewhere,” he said, adding that it was not yet clear how far the costs of adapting to permanent shifts in demand had already been incurred or passed on to consumers.
However, Broadbent gave no hint that he would favour an immediate tightening of policy.
His cautious comments suggest there will be a split of opinion on the Monetary Policy Committee when it meets next month, rather than a swing towards an early end to quantitative easing.
In May, a majority on the nine-member committee voted to leave the BoE’s ultra loose policy stance unchanged, although Andy Haldane, who has now stepped down as chief economist, dissented with a lone vote to pare back the central bank’s bond-buying programme.
Markets were taken by surprise last week when Sir David Ramsden, the BoE’s deputy governor for markets and banking, suggested that monetary policy might now have to be tightened earlier than thought to rein in inflation.
He was echoed by Michael Saunders, an external member of the committee, who said that if the trends seen in the economy since May continued, it could “become appropriate fairly soon to withdraw some of the current monetary stimulus”.
But their views have since been tempered by comments from Jonathan Haskel, another external MPC member, who said this week that tightening policy could choke off the recovery and was not the right approach “for now”.
Catherine Mann, who will join the MPC in September, has also warned against a premature tightening, telling the parliamentary Treasury select committee this week that the global recovery was more fragile than it appeared.
View original post