In a speech at Glasgow’s Scottish Council for Development and Industry, Huw Pill said inflation expectations at various horizons have, on balance, “moved in an unfavourable direction”.
In August, UK inflation sat at 9.9 per cent - a 40-year high. The Bank of England’s target is 2 per cent.
The Office for National Statistics will publish inflation data for September next week. Citi has predicted a 0.3 percentage point jump to 10.2 per cent.
Pill said the government’s “mini” Budget, which included a number of unfunded tax cuts and a £150bn energy relief package, will provide “a further stimulus” to demand relative to supply over the medium-term.
The association with the mid-1970s is not reassuring.Huw Pill, Bank of EnglandAs a result, the central bank’s chief economist said this would add to the inflationary pressure coming from the government’s Energy Price Guarantee - which limits the amount a bill payer can be charged per unit of gas or electricity.
“Lower utility bills will support current household real incomes and thereby support consumption demand,” said Pill.
“With demand pressure more sustained than otherwise, inflationary pressures may prove more persistent than would have been expected.
“On balance, I would expect the net effect of these various channels to add to inflationary pressures at the traditional monetary policy relevant horizon of around two years.”
Even if the government’s £150bn energy relief package does reduce inflation relative to what it would have been this autumn, Pill said most people’s lived experience is a rise in October’s headline inflation rate as utility prices increase.
He also said the impact of government’s relief for the corporate sector on consumer prices is “more difficult to assess”, as firms seek to re-establish margins and the incidence of the energy price support feeds through the price pipeline.
The International Monetary Fund (IMF) has also warned high levels of inflation will persist longer in the UK than in almost all other advanced economies.
By the end of 2023, the IMF predicts Britain's level of inflation will be the highest in the G7, and second highest in the 19-member eurozone after Slovakia.
“Household and corporate surveys of inflation expectations at various horizons – although subject to methodological shortcomings and offering sometimes inconsistent messages – have, on balance, moved in an unfavourable direction, especially if one points weight on the distribution of views not just the median,” said Pill.
Yesterday (October 11), labour market data showed the unemployment rate had fallen to 3.5 per cent, the lowest level observed since 1974.
Pill said while at first read this looks like a rare piece of good news, viewed through the lens of efforts to return inflation to target it is a “mixed blessing”.
He added: “Indeed, the association with the mid-1970s is not reassuring in that respect.
“Tight labour markets support wage growth, currently running at rates above those we typically deem as consistent with the inflation target.”
ruby.hinchliffe@ft.com
