Expert sounds alarm as Bank of England economist notes inflation ‘uncomfortably high’ amid cost of living crisis
The squeeze on British households from high inflation could be larger and more prolonged than foreseen. Economists sounded this warning amid a series of economic shocks from Russia’s war in Ukraine, Brexit, and Covid.
A member of the Bank of England’s rate-setting monetary policy committee (MPC) Michael Saunders said inflation was “uncomfortably high” as households are hard-pressed by rising food, energy, and fuel bills.
The independent economist, who voted for a higher increase in borrowing costs last week compared to most of his MPC colleagues, stated that he was worried that expectations for higher inflation could become entrenched for longer than forecast. He commented:
“Energy price squeezes are painful. They hit those on the lowest incomes worst.”
His warning was repeated by the Bank’s former chief economist who now heads the Royal Society for Arts thinktank Andy Haldane who said high rates of inflation could persist for “years rather than months”.
Haldane, who was one of the most esteemed economists to warn on inflation risks before he left the Bank in 2021, told LBC radio station that he wished firmer action had been implemented sooner.
Asked if inflation could rise over ten percentage points or go even higher, he said:
“It could. I fear it might … I’m slightly fearful, it might stick around for some little while as well. This won’t come and go in a matter of months. I think this could be years rather than months.”
Threadneedle Street lifted its key interest rate by 0.25% to a 13-year high of 1% last week to tackle rising inflation, despite warning that there were increased risks of a recession prompted by the cost of living crisis.
The Bank said the benchmark for the annual rise in living costs could break through ten percentage points later this year but then was likely to climb down towards its 2% target within three years as economic shocks from the war in Ukraine and Covid gradually fade.
Saunders, who alongside two other members of the nine-strong MPC was in the minority and requested for a tougher 0.5% rate rise, said it would be better to increase borrowing costs more aggressively now to stop enduring high rates of inflation in the future. He said in a speech at the Resolution Foundation think tank.
“I put considerable weight on risks that, unless checked by monetary policy, domestic capacity and inflation pressures would probably be greater and more persistent than the central forecast.”
This kind of plan could help avert more aggressive hikes to hit the 2 percentage point target in the future, which “could be very costly in economic terms,” he said.
Saunders, who is due to leave the MPC in August, said Britain’s economy was facing “a series of major shocks” from soaring energy prices, Brexit, and the Covid pandemic, alongside longer-term effects from an aging population.
A lack of business investment and shortage of workers could have been intensified by exiting the EU, he said, at a time when a mismatch between supply and demand in the jobs market was pushing employers to increase workers’ pay. He added:
“Costs relating to Brexit appear to have played some role, although this effect has recently diminished as one-off cost increases start to drop out of the annual comparison.”
Threadneedle Street estimates average wage growth will be near 6% this year, driven by record job vacancies and unemployment at the lowest level in 40 years. Nevertheless, this continues to be significantly below inflation, increasing pressure on workers, while average pay settlements are expected to retreat in 2023.
Haldane, who worked as the chair of Boris Johnson’s leveling up team for six months between exiting the Bank and joining the RSA this spring, said there was a “better than evens chance” that Britain’s economy would fall into a depression. He concluded:
“We could find ourselves heading south rather than north.”