Inflation could rise well beyond Bank of England expectations, chief economist Andy Haldane says, increasing odds of a “bad surprise” in the form of a sharp rise in interest rates .
Speaking as US inflation hit 4.2%, its highest level since 2008, Haldane said the UK’s rate of price hike was increasingly likely to catch up.
He said rising energy costs were already putting upward pressure on prices, and bottlenecks in labor supply were likely to add to that, wages and inflation playing a ‘leap frog’ as workers demand higher wages to fill employer staff shortages.
Of the nine members of the Bank’s monetary policy committee (MPC) charged with setting interest rates, Haldane was the only one to vote at its June meeting to scale back its quantitative easing stimulus package.
The Bank’s view is that inflation will hit 3% this year before falling back in 2022. But while Haldane dismissed the likelihood of 1970s-style double-digit inflation, he said: a little will be the highlight.
“There is a growing risk that will not be the peak and we could see a greater persistence and a higher level of that peak,” he told MoneyWeek magazine.
“Next year could see price pressures intensify, but not abate. “
The result, he added, could be a “bad surprise” if the Bank opts for a sharper-than-expected hike in the base interest rate, from its lowest level of 0.1%, to curb inflation.
Such a decision would help savers but would make life harder for people and businesses who borrow to invest money or buy property.
Haldane said growing pressure on prices was supported by a faster than expected economic recovery, coupled with bottlenecks in the supply of goods and labor, due to Brexit and Covid- 19.
He said the economy “made up all the lost GDP and [is] back to roughly pre-Covid levels ”.
“Brexit added something to that and Covid added an extra booster, with countries seeing the case for greater resilience in their domestic supply chains behind international supply chains having in some fractured case, ”he added.
Haldane also touched on digital currencies, saying the Bank could launch its own but bitcoin could not replace cash.
“The idea that bitcoin could ever play the role of a means of payment is totally fanciful and should horrify us,” he said, pointing to the lack of assets backing the currency.
Currency, he said, must be based on “something other than crypto code and promises.”