A deputy governor of the Bank of England has said that while recent price hikes caused by high demand and supply chain issues will likely fade away, recent wage changes might stick around longer.
Ben Broadbent, the deputy governor for monetary policy, said that supply bottlenecks and a high demand had pushed up prices in recent months, leading to rises in inflation.
Wages have also been seen to grow – by 8.8% according to the most recent Office for National Statistics (ONS) data.
“When it comes to that overall imbalance or shift in demand from services to goods, or indeed the bottlenecks that have exacerbated that on the goods side,” Dr Broadbent told MPs on the Treasury Select Committee.
“Our assumption has been – and I still think this is reasonable – that because those things are caused by the pandemic, they will tend to dissipate as the pandemic itself fades away.
“So if you condition a forecast, as we do, on the view that the pandemic won’t continue forever, I think it’s reasonable to expect those imbalances to narrow.
“In the labour market, I suspect that they could be more persistent.”
The latest figures from the Office for National Statistics show that inflation was at 2% in July.
But amid issues in UK supply chains, businesses have been warning for weeks that costs for staff and materials are rapidly rising. Many of these costs are likely to be passed onto customers, and hit households.
The Bank wants inflation to lie at 2%, but has forecast that it will reach 4% later this year.
Bank governor Andrew Bailey said that an increase in global demand for goods has pushed up oil and metal prices and bottlenecks in supplies has also put pressure on inflation.
He added that there is much more demand for goods than the supply of goods.
Other non-Covid related issues, such as a global shortage of semiconductor chips, have also pushed up inflation.
The semiconductor shortage is pushing up second hand car prices, because new car production has slowed.
Mr Bailey said that the Bank’s earlier inflation forecasts had not predicted some of these issues, but like Dr Broadbent he does not expect them to stick around.
“We think that this will not be persistent for a number of reasons. Historically commodity prices revert back to their mean levels.
“For commodity prices to continue to push up inflation, it’s not just that they stay at a high level – they have to keep going up … we think that’s unlikely.”
A month ago the Bank of England’s Monetary Policy Committee decided to keep the Bank’s base interest rate at 0.1%.
The committee unanimously backed the decision. However one member, Michael Saunders, voted against the MPC’s decision to keep quantitative easing at £895 billion.
He wanted the figure to be slashed by £45 billion amid fears over rapidly increasing inflation.