The deputy governor of monetary policy at the Bank of England moved to temper fears that the UK economy is facing a period of persistently higher inflation today.
In a speech, Ben Broadbent said that he was “not convinced that the current inflation in retail goods prices should in and of itself mean higher inflation 18-24 months ahead.”
“The direct effect on inflation will be gone in a year or so, before monetary policy could do much about it” he said.
Read more: UK inflation hits 2.5 per cent in June
Broadbent doubled down on the Bank’s position that the recent surge in prices is likely to be transitory and will ease once the supply side of the economy returns to pre-Covid levels.
As a result, he said that monetary policy should “look through” the immediate impact of inflation.
Latest figures from the Office for National Statistics shows inflation is already running higher than the Bank’s target, reaching 2.5 per cent annually in June.
Production of goods is highly elastic, meaning supply rapidly increases as prices rise, Broadbent stressed. Higher levels of output tends to put downward pressure on prices, which pulls down long-term average inflation.
He highlighted severe imbalances in the supply of and demand for labour, primarily driven by the furlough scheme restricting inflows into the jobs market.
“Some firms are finding it hard to recruit people… this mismatch may have added to near-term pressure on wages.”
The remarks come as many sectors of the UK economy are struggling with crippling shortages of key materials due to supply chains struggling to cope with soaring demand as economies emerge from Covid.
Firms are also buckling under the pressure of staff being forced to self-isolate after being pinged by the NHS Covid-19 app due to coming into contact with someone who has tested positive for coronavirus.