Inflation Expected to Exceed 5% by Spring!

The Bank of England’s monetary policy chief has said inflation is likely to soar “comfortably” above 5% next spring 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 that 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, commentators believe.

Speaking to Leeds University Business School, Ben Broadbent, the central bank’s deputy governor, said inflation was on course to increase until at least April next year, when the price cap is due to be raised. He believes 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 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. 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 Bank’s nine-strong monetary policy committee (MPC) to wrongfoot 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 of England raising rates from 0.1% to 0.25%, mainly due to the emergence of the Omicron variant and uncertainty about how long energy prices will remain high.

Last week Saunders hinted that he would vote to maintain the base rate at 0.1%, when he said: “There could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy.”