The Bank of England’s chief economist has warned high rates of UK inflation could persist for longer than expected, despite a fall in wholesale energy prices in recent weeks and the economy on the brink of recession.
Huw Pill said the slowdown in the British economy and sharp fall in European gas prices could help to take the sting out of the highest rates of inflation in more than four decades. Threadneedle Street forecasts headline inflation – which was running at 10.7% in November – will ease from the middle of this year.
However, he said risks remained of “self-sustaining momentum”, driven by workers demanding higher wages and businesses putting up the price of their products in response to high rates of inflation.
Speaking at a conference in New York, Pill said: “The distinctive context that prevails in the UK – of higher natural gas prices with a tight labour market, adverse labour supply developments and goods market bottlenecks – creates the potential for inflation to prove more persistent.”
In response to the highest levels of inflation since the early 1980s, the Bank raised its main interest rate to 3.5% last month, up from 0.1% a year before. City investors anticipate the central bank will raise rates again to 4% at the next meeting of its monetary policy committee in February.
Pill said that although natural gas prices had fallen, they remained significantly higher than historical levels, raising the threat of persistently higher inflation because businesses and households may push to offset these costs by demanding higher wages and prices.
“The longer that firms try to maintain real profit margins and employees try to maintain real wages at pre-energy price shock levels, the more likely it is that domestically-generated inflation will achieve its own self-sustaining momentum,” he said.
Rishi Sunak promised last week to cut inflation by half in 2023, one of five pledges in his first major speech of the year. Inflation reached a 41-year high of 11.1% in October. However, it was already forecast to fall to less than 4% by the end of this year by the Office for Budget Responsibility.
Amid higher interest rates from the Bank, economists are warning of a slowdown in the economy and a sharp fall in house prices as families grapple with the rising cost of borrowing.
Private renters are also facing an increase in their housing costs, with rental prices rising at their highest rate in the UK since records began in 2016.
Source: the guardian
