Bank of England governor Andrew Bailey has warned there are some “very hot spots in terms of prices”, but that he is confident inflation won’t run well above the UK’s two per cent target in the long-term.
Annual CPI increased from 0.7 per cent to 1.5 per cent in April, creating fears among some that inflation could be a future problem as the UK economy recovers.
Bailey told a parliamentary committee that the Bank has to “watch this very carefully”, but that there was already an expectation CPI would rise like this as restrictions are shedded.
Bank of England chief economist Andy Haldane said battling inflation was the largest challenge facing the UK economy and that he believed it could be more persistent long-term.
Economists at the central bank have said they expect inflation will eventually hit, and slightly exceed, its two per cent inflation target as the economy recovers.
Its recent report said this may mean a “modest” increase of interest rates, by around 0.5 per cent, in around two years’ time.
However, some pundits have said UK inflation could run rampant thanks to the hundreds of billions of pounds of Covid stimulus from the UK government.
Bailey downplayed the prospects of inflation causing a serious problem in the medium to long-term.
“We have got to watch this carefully, because clearly we haven’t seen any signs of inflation expectations rising in a concerning way, but if we started to see that or if we started to see these prices increases embedded that is a cause of concern,” he said.
“There are some very hot spots, some hot areas in terms of prices – there is no doubt about that. I think they reflect some global effects, global commodity prices have increased, we’ve got a world shortage of some chips, we’ve had disruptions to trade.
“We’ve got at the moment quite an unbalanced recovery because of Covid…demand in goods is much stronger than services, but that’s already beginning to correct as the services economy reopens.”
Andy Haldane said he broadly agrees with Bailey’s view, but that he believes there could be a greater chance for long-term inflation.
He said the “balance of risks has shifted” during the pandemic away from economic scarring and that the Bank of England’s “focus should be squarely on our primary objective…which is inflation”.
He said: “The question becomes – will those price rises stick around, will those cost pressures flow through to consumer prices on a more persistent basis?
“I think it’s a better than evens chance that companies will take advantage of what will then be a pretty strong economy – an economy running above it’s pre-Covid levels of activity.
“My judgement would be there is a risk of it being more persistent.”