Inflation could rise well beyond the Bank of England’s expectations, according to its chief economist, Andy Haldane, raising the chances of a “nasty surprise” in the form of a sharp interest rate hike.
Speaking as US inflation reached 4.2%, its highest level since 2008, Haldane said the UK’s own rate of price rises was increasingly likely to catch up.
He said rising energy costs were already putting upward pressure on prices and that bottlenecks in the labour supply were likely to add to that, with wages and inflation playing a “game of leapfrog” as workers demand higher pay to plug employers’ staffing gaps.
Of the Bank’s nine-strong interest rate-setting monetary policy committee (MPC), Haldane was the only one to vote at its June meeting to reduce its quantitative easing stimulus plan.
The Bank’s house view is that inflation will hit 3% this year before retreating in 2022. But while Haldane dismissed the likelihood of 1970s-style double-figure inflation, he said: “Nor do I think it’s nailed-on that three-and-a-bit will be the high-water mark.”
“There’s a rising risk that won’t be the peak and we could see greater persistence and a higher level of that peak,” he told MoneyWeek magazine.
“Next year could see price pressures building, not abating.”
The result, he added, could be a “nasty surprise” if the Bank opts for a sharper-than-expected rise in the base interest rate, from its rock-bottom 0.1% level, to cool inflation.
Such a move would help savers but make life harder for people and businesses borrowing to invest money or buy property.
Haldane said increasing price pressure was underpinned by quicker-than-expected economic recovery, coupled with bottlenecks in the supply of goods and labour, because of Brexit and Covid-19.
He said the economy “made up all of the GDP lost ground and [is] back roughly to pre-Covid levels”.
“Brexit added something to that and Covid has added an additional amplifier with countries seeing the case for building greater resilience into their domestic supply chains off the back of international supply chains having in some cases fractured,” he added.
Haldane also addressed digital currencies, saying the Bank could launch its own but that bitcoin could not serve as a substitute for cash.
“The notion that bitcoin could ever play the role of a payments medium is totally fanciful and it should fill us with horror,” he said, pointing out the lack of assets backing the currency.
Currency, he said, must be based on “something other than cryptographic code and promises”.