Monetary Policy  

UK faces more challenges than most countries with high inflation

UK faces more challenges than most countries with high inflation
Huw Pill, who warned that the Bank of England may need to raise interest rates further to tackle inflation (Hollie Adams/Bloomberg)

The UK is facing a distinct number of challenges that means inflation is being pushed higher than in other countries, the chief economist at the Bank of England has said.

In a speech in New York, Huw Pill said the UK is “distinctive” in that it is the only country facing a combination of issues that are pushing prices higher, indicating that UK interest rates may remain raised.

Pill said: “Inflation in the UK is currently too high…the monetary policy committee will continue to act as necessary to ensure the inflation target is achieved.”

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Inflation in the UK was 10.7 per cent in the twelve months to November, lower than the 11.1 per cent seen in October but still much higher than the BoE’s 2 per cent target.

He outlined the three challenges facing the UK, which are the trade shock to Europe caused by the war in Ukraine, interest rates being raised from their historic lows to manage high inflation, and companies pushing up prices and employees demanding higher wages.

“The distinctive context that prevails in the UK – of higher natural gas prices with a tight labour market, adverse labour supply developments and goods market bottlenecks – creates the potential for inflation to prove more persistent.”

The first challenge, which has pushed up energy prices, was a “genuine surprise”, Pill said. 

Central bank policy cannot prevent the impact this has on households’ budgets, he added, but it can work to stop “self-sustaining momentum” in inflation above 2 per cent.

However, the UK is also facing a well-documented, but as yet not fully understood, decline in the number of people working in the UK, particularly between the ages of 50 and 65.

Pill said the impact of the pandemic on early retirement and long-term health, and underlying demographic developments have all played a role.

This is impacting the supply of labour to the UK market, which has also been negatively impacted by Brexit. 

“While aggregate levels of immigration into the UK remain elevated…post-Brexit immigration has proved less effective in addressing labour market mismatches and more costly for employers,” Pill said.

The economist pointed to some good news - although the intensity of the disruption to global supply chains caused by the pandemic was underestimated, this seems to have eased in recent months, and global goods price inflation has weakened slightly.

Ultimately, further increases in interest rates “may be required” for inflation to drop down to the bank’s 2 per cent target, Pill said.

sally.hickey@ft.com