Higher inflation is set to continue for the rest of the year in the UK as the economy recovers from the Covid-19 crisis, according to the Governor of the Bank of England.
Andrew Bailey, giving his annual Mansion House speech in the City of London, said he expected the rises in inflation to be temporary, but warned that it could be a longer-term problem unless pent-up demand reduces and supply chains can keep up.
He said: “We expect that rise to continue in the near term as we go through the rest of this year, such that CPI inflation is expected to pick up further above the target, owing primarily to developments in energy and other commodity prices.”
The Bank of England’s inflation target is 2%. The most recent inflation figures were at 2.1% in May following increases primarily in energy prices.
The Governor said if inflation was not to cool down, the Bank would not hesitate to introduce new measures to reduce high spending, such as increasing interest rates.
He said: “If we see those signs (of inflation not falling), we are prepared to respond with the tools of monetary policy.”
Mr Bailey said inflationary pressures have come from prices returning to pre-Covid levels and demand outstripping supply.
He explained: “There are shortages of some products, notably semi-conductors, some agricultural commodities, and some end-user products such as fitness equipment and home and garden furniture.”
He added: “It is entirely possible that we will witness temporary periods of excess demand, or what more commonly we might describe as ‘bottlenecks’.
“There are good reasons to interpret this as a temporary feature, but we must be on the lookout for the risk that these features are more sustained.”
Those risks include demand for products remaining high at a time when supply chains are squeezed – although he suggested as restrictions ease, people will turn to spending saved cash on experiences and services.
He also warned that the huge sums saved by typically richer households during the crisis could lead to greater spending than first thought.
The Office for Budget Responsibility (OBR) has predicted around 5% of the £180 billion in savings will be spent.
The Governor also said wage pressures could impact inflation.
His speech came as Chancellor Rishi Sunak laid out plans for the financial services sector in the UK in his own Mansion House speech.
Mr Sunak said the UK would be the most “advanced and exciting” financial services hub in the world.
He said: “As the baton passes to a new generation of leaders in finance, I feel optimistic about the future. Ambitious at home. Confident internationally.
“With a plan to make this country the world’s most advanced and exciting financial services hub for decades to come, creating prosperity at home and projecting our values abroad.”
He also said the UK would continue to lead the way with green initiatives, including the opportunity for the public to invest in Government green initiatives.
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