The Bank of England’s monetary policy chief has warned that inflation is likely to soar “comfortably” above 5% next year when the energy regulator Ofgem raises a price cap affecting millions of households.
Record high levels of vacancies are also likely to persist for longer than previously expected as the jobs market adjusts to changes in the economy brought on by the pandemic, said Ben Broadbent, the central bank’s deputy governor with responsibility for monetary policy.
The uncertainty surrounding the impact of rising wage demands by workers seeking to protect themselves against falling living standards meant he was continuing to watch for signs of a wage/price spiral.
“If wage earners’ expectations of future inflation rise in response, or if they seek compensation for the rises in the costs of living that have already occurred, wages could also accelerate further, even without any additional decline in unemployment,” Broadbent said.
Speaking to Leeds University Business School, he said inflation was on course to increase until at least April next year, when the price cap is due to increase. “The aggregate rate of inflation is likely to rise further over the next few months and the chances are that it will comfortably exceed 5% when the Ofgem cap on retail energy prices is next adjusted,” he said.
He said the recent jump in inflation for goods, especially cars, driven partly by a global supply chain squeeze, was likely to fade and in some cases reverse, before a Bank rate rise would have an impact.
He said: “I still think it’s more likely than not – looking a couple of years ahead as we should – that these pressures on traded goods prices are more likely to subside than intensify.”
In the only reference to the newly identified coronavirus variant in his speech, Broadbent added: “Obviously the new Omicron variant might interrupt that process, depending on the effectiveness of existing vaccines against it and the severity of its health effects. Those we don’t yet know.”
Broadbent was one of the seven members of the BoE’s nine-strong monetary policy committee to wrong-foot financial markets by voting to keep interest rates on hold last month.
Signals from the governor, Andrew Bailey, and the MPC members Michael Saunders and Sir Dave Ramsden convinced investors that the central bank was poised to tighten policy.
Ahead of a meeting on 16 December, investors are pricing less than a 50% chance on the Bank raising rates from 0.1% to 0.25%, mainly due to the the emergence of the Omicron variant and uncertainty about how long energy prices will remain high.
Broadbent used his speech to stress how moves such as a changes to interest rates by a central bank could take two years to have an effect on the economy.
“What we can do – and what is the best possible approach – is to think at every meeting about the level of interest rates that will maximise our chances, a couple of years from now, of hitting the inflation target exactly,” he said. “That is what we will continue to do.”