Pressure on UK households from high inflation could be greater and last longer than expected, amid a series of economic shocks from Brexit, Covid and Russia’s war in Ukraine, economists have warned .
Michael Saunders, a member of the Bank of England’s Monetary Policy Committee (MPC), said inflation was “uncomfortably high” as households come under pressure from soaring energy, food and utility bills. fuel.
The Independent Economist, who voted for a bigger increase in borrowing costs last week than most of his MPC colleagues, said he fears expectations of higher inflation are no longer taking root longer than expected.
“Energy price cuts are painful. They hit those with the lowest incomes the most,” he said.
His warning was echoed by Andy Haldane, the Bank’s former chief economist who now heads the Royal Society for Arts think tank, who said high inflation rates could last “for years rather than month”.
Haldane, who was among the most prominent economists to sound the alarm over inflation risks before he left the Bank last year, told LBC radio station he wanted tougher action to be taken. earlier.
When asked if inflation could exceed 10% or go even higher, he replied: “It is possible. I’m afraid it might…I’m a little afraid, it might also last a little while. It won’t come and go in a few months. I think it could take years rather than months.
Threadneedle Street raised its benchmark rate by 0.25 percentage points to a 13-year high of 1% last week to tackle soaring inflation, despite warnings there were growing risks of recession caused by the cost of living crisis.
The Bank said the measure of the annual rise in the cost of living could exceed 10% later this year, but would likely fall back towards its 2% target within three years as the economic shocks of Covid and of the war in Ukraine are gradually fading. .
Saunders, who along with two other members of the nine-member MPC was in the minority calling for a harsher rate hike of 0.5 percentage points, said it would be better to raise the costs of borrow more aggressively now to stop persistently high rates of inflation in the future.
“I place considerable weight on risks which, unless controlled by monetary policy, domestic capacity and inflationary pressures would likely be larger and more persistent than central forecasts,” he said in a statement. speech to the Resolution Foundation think tank.
Such a plan could help avoid more aggressive hikes to hit the 2% target in the future, which “could be very costly in economic terms,” he said.
Saunders, who is due to leave the MPC in August, said the UK economy was suffering a “series of major shocks” from Brexit, the Covid pandemic and soaring energy prices, as well as the effects longer term of an aging population.
Labor shortages and lack of business investment could have been exacerbated by leaving the EU, he said, at a time when a mismatch between supply and demand in the labor market forced employers to increase workers’ wages.
“Brexit-related costs appear to have played some role, although this effect has diminished recently as one-off cost increases start to fade from the annual comparison,” he said.
Driven by unemployment at the lowest level in 40 years and record vacancies, Threadneedle Street expects average wage growth to reach 6% this year. However, this remains well below inflation, adding pressure on workers, while average wage settlements are expected to fall next year.
Haldane, who headed Boris Johnson’s upgrade task force for six months between leaving the Bank and joining RSA this spring, said there were “more than equal chances “that the British economy falls into recession.
“We could find ourselves heading south rather than north,” he added.