Bank of England’s Andy Haldane warns of rising inflation

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The outgoing chief economist of the Bank of England has warned that inflation could rise more than expected and force the central bank to take a dangerous “handbrake turn” to keep the economy from overheating.

In a farewell shot to his fellow rate-setters on his last day at Threadneedle Street on Wednesday, Andy Haldane said he expected a spike in consumer prices to push inflation up in the Kingdom United at nearly 4% this year.

The bank’s nine-member Monetary Policy Committee (MPC), from which it is withdrawing, said last week it expects inflation to peak at 3% by the end of 2021, before falling back in 2022 as the post-Covid economic boom fades.

In a speech to the Institute for Government think tank marking his departure from the Bank, Haldane said there was reason to believe that the current isolated pockets of rising prices in parts of the economy Britain would translate into a broader “significant and persistent” rise in inflation.

“By the end of this year, I expect UK inflation to be closer to 4% than 3%,” he said.

Such a scenario would force the central bank to raise interest rates at a faster pace or to a significantly greater extent than currently expected, he said.

“If this risk materialized, everyone would lose out – central banks whose mandates are missed and which have to put the economic brakes on, businesses and households facing a higher cost of borrowing and living, and governments facing increasing debt service costs. As in the past, avoiding this inflationary surprise is one of the central tasks of central banks, ”he said.

Haldane’s intervention marks his final warning about the risks posed by inflation before leaving to lead the Royal Society for Arts think tank later this year. If inflation peaked at 4%, that would be double the Bank’s 2% target rate, set by the government as a target for the central bank.

Inflation in the UK rose to 2.1% in May from 1.5% a month earlier, due to rising fuel prices, as well as the cost of clothes, meals and drinks at the pub and at the restaurant while the reception areas reopened after the lockdown. However, much of the increase was due to the collapse in consumer prices and energy costs a year ago when the pandemic began. Inflation is measured using a basket of goods and services and taking the price change over 12 months.

However, economists are increasingly concerned that bottlenecks in global supply chains and rising commodity prices, associated with surging consumer demand as restrictions from Covid-19 are gradually relaxed, resulting in higher prices in stores and for other goods and services.

This could be exacerbated by billions of pounds of government support to households and businesses, as well as low interest rates from central banks around the world, used to cushion the economic fallout from the pandemic.

However, others say recent inflationary pressures are likely to be temporary, while cuts in emergency aid could stifle a sustainable economic recovery, and that risks remain as the pandemic continues.

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