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UK inflation risk depends on wage growth, warns BoE officials

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The sharp rise in consumer goods prices won’t last, but UK rate makers should be on the lookout for signs of wage increases at a rate that could lead to more sustained inflation, a senior BOE official said.

Deputy Monetary Policy Governor Ben Broadbent acknowledged that the rise in UK inflation is difficult to explain. The average over the past 18 months has been slightly below pre-pandemic, although gross domestic product (GDP) is still well below pre-crisis levels.

There are good cases where some of the contributing factors are likely to be temporary, he said. In particular, the surge in global commodity price inflation should ease as consumers shift to spending on services and supply bottlenecks ease.

Inflation is likely to rise further in the coming months, but an appropriate policy response could be “’nothing.’ . . If this is just a story about global commodity prices,” he asserted.

But he said policy makers would have to “be very careful. . . This is because inflationary pressures in the domestic economy could be more persistent. The end of the leave system will reduce the manpower shortage, but there will still be a mismatch between the jobs available in certain places and the workforce, which could result in companies paying higher wages.

“We cannot all become IT professionals overnight. Offices and restaurants in the city center cannot be easily demolished and moved to another location. It is not yet clear to what extent the cost of adapting to permanent changes in demand has already been incurred or passed on to consumers.”

However, Broadbent did not imply that it would favor immediate policy tightening.

His prudent comments suggest that the Monetary Policy Committee will be divided at next month’s meeting rather than a swing towards an early end of QE.

In May, a majority of the nine-member committee decided not to change the BoE’s super-perfect policy stance, but Andy Haldane, now stepping down as chief economist, opposed a unilateral vote to curtail the central bank’s bond-buying program. .

suggestion

Markets were surprised last week when Sir David Ramsden, the BoE’s Vice President of Markets and Banks, suggested that tightening monetary policy might have to be implemented earlier than expected to contain inflation.

Michael Saunders, an outside member of the committee, said, “Withdrawing some of the current monetary stimulus could become appropriate fairly quickly” if the trend that has emerged in the economy since May continues.

But their views have been tempered by comments from another outside MPC member Jonathan Haskel, who said this week that austerity could stifle the recovery and that it’s not the right approach “for now”.

Catherine Mann, who will join the MPC in September, also warned of premature austerity, telling the Congressional Treasury Selection Committee this week that the global recovery is more fragile than it seems.

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