Andrew Bailey has reiterated that the Bank of England is not concerned about the recent surge in inflation, attempting to quash mounting concerns that price rises may soon spiral out of control.
Speaking at his annual Mansion House speech, the Governor of the Bank of England moved to temper fears that prices in the UK are rising too quickly.
“It is important not to overreact to temporarily strong growth and inflation” he said, adding that the majority of evidence suggest price rises are transitory.
The speech is in part a rebuke of the Bank’s outgoing chief economist’s criticism that it is moving too slowly on tackling price rises and being complacent.
Andy Haldane said yesterday he expects inflation to rise to four per cent by the end of the year, two percentage points higher than the Bank’s target.
Latest figures from the ONS show UK inflation is already running higher than the Bank’s target, reaching 2.1 per cent annually in May.
Bailey did admit the Bank had undershot predictions of the scale of the UK’s economic recovery after restrictions to curb the spread of coronavirus were lifted.
However, he outlined several factors explaining why high inflation is purely transitory.
Rapid price growth is being fulled by shortages for caused by severe supply and demand imbalances, “but these imbalances should not last” he stressed.
Inflation was also likely to ease once “demand for goods [switches] towards services as restrictions are lifted, which should rebalance the composition of demand.”
Spending is likely to be channelled into sectors of the economy that currently have high levels of slack, he said. Spare capacity typically puts downward pressure on prices.
He did stress that the Bank is prepared to respond rapidly should price rises persist.
Ed Monk, associate director for personal investing at Fidelity International, says: “The picture on inflation seems particularly chaotic right now. There are signs of rising prices for raw materials around the world, which may signal persistent inflation to come.”