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UK inflation could fall sharply as energy prices fall, bank boss says bank of england

UK inflation could fall sharply as energy prices fall, bank boss says  bank of england

 


The governor of the Bank of England has said inflation in the UK could drop sharply as global energy prices have fallen in recent weeks, but warned that labor shortages could still be a major risk amid the cost-of-living crisis.

Andrew Bailey told members of the Commons Treasury Council that Britain’s inflation rate could drop significantly this year after reaching its highest level since the early 1980s in the fall after Russia’s invasion of Ukraine boosted wholesale energy costs.

The single biggest reason inflation has risen to that level is the war in Ukraine. It is also the reason why inflation is most likely to fall sharply in the future, since energy prices are no longer rising. In fact they are coming down, he said.

The annual rate of inflation, measured by the consumer price index, fell back to 10.7% in November from 11.1% a month earlier, a 41-year high. The official figure for December, scheduled for Wednesday, is expected to decline moderately to 10.6%. That’s still well above the Bank of England’s target of 2%.

In response to questions from MPs about the stability of the UK’s financial system, Bailey warned that confidence in the UK remains fragile, although the risk premium on UK assets has all but disappeared in the aftermath of Liz Trusss’ disastrous mini-budget in September.

He said it would take some time to convince people that things were back to normal.

The bank’s governor confirmed that it made a profit of around 3.8 billion from the sale of government bonds purchased in an emergency intervention in financial markets used to ease the mini-budget disruption. The cash will go to the Treasury, he added.

His comments come as the bank is considering raising interest rates for the 10th consecutive time early next month. to combat inflation.

Rishi Sunak has also promised to halve the inflation rate this year. Inflation is expected to fall below 4% by the end of the year, according to forecasts released in November by the Treasury Department’s oversight office, the Office for Budget Responsibility.

Wholesale gas prices have fallen in recent weeks as warmer weather this winter and higher levels of gas storage are likely to ease concerns about future Russian gas shortages, lowering household costs. However, energy costs are still much higher than in recent years.

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Bailey warned that the UK’s job market’s exodus after the Covid pandemic could be the biggest risk for persistently high inflation for longer than expected.

The main risk of falling inflation is the supply side, particularly in this country, of a shrinking workforce, he said.

Sources

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2/ https://www.theguardian.com/business/2023/jan/16/uk-inflation-could-fall-rapidly-as-energy-prices-drop-bank-of-england-andrew-bailey

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