Inflation may turn out to be lower than the Bank of England’s new forecast for 4 per cent if supply chain bottlenecks clear quickly and goods flood back on to the market, the governor Andrew Bailey has said.
In its August monetary policy report, the Bank forecast consumer price inflation to reach 4 per cent later this year, the highest level since December 2011. It explained that a third of the increase in its forecast, up from 2.5 per cent in May, was due to higher energy costs and the rest was down to disruptions to global supply chains.
“One of the risks is that these supply bottlenecks could unblock and we could get actually quite a wave of supply coming back onto the market,” Bailey, 62, said in a presentation to businesses.
Shortages of commodities and key components, such as semiconductors, along with factory closures due to Covid restrictions, and high shipping costs have driven up the prices of goods globally. Combined with higher demand than usual for goods because people have been unable to spend on services, the result has been sharply higher prices.
On Thursday, the Bank said it was confident the goods inflation would prove “transitory” and consumer prices would drop back to the target rate of 2 per cent. It expects more supply to come on to the market to meet the increase in demand and for commodity prices to stabilise and bottlenecks to ease.
Advertisement
Markets are signalling that is what will happen. “Prices in futures markets imply shipping costs and some commodity prices are expected to fall from their elevated levels,” the Bank’s monetary policy report said.
Speaking at the same event, Ben Broadbent, deputy governor for monetary policy, said the bigger risk to the inflation forecast was the tight labour market and wage growth. If the expected rise in inflation seeps into pay settlements it could create more lasting problems.
“I would say the judgments about labour market frictions dissipating are probably more uncertain than those on the trade and goods side of things,” Broadbent, 56, said.
The Bank judges that mismatches in the labour market, caused in part by furlough, have temporarily increased the equilibrium, non-inflationary level of unemployment. “As the economy normalises, those frictions would be expected to fade,” the Bank’s report said. Unemployment would be expected to fall without putting upward pressure on inflation.
On the same webcast as Broadbent, Bailey said labour shortages had been the largest theme in his recent discussions with businesses. If the labour market shortages and mismatches prove persistent, the Bank may have to raise rates earlier than expected.
Advertisement
“We’re not complacent,” Bailey said on Thursday. “If these things don’t turn out like that, then there will be no question that we will have to act.” The Bank is forecast to raise rates from 0.1 per cent to 0.25 per cent by the middle of next year.
