ITV News Business and Economics Editor Joel Hills on what the Bank's forecast means for the millions across the UK
There’s plenty to celebrate in the Bank of England’s latest assessment of our economic prospects. It thinks that output is on track to return to its pre-crisis level by the end of this year and that - strikingly - unemployment has peaked. There are around one million or so people who are still currently reliant on furlough support. If the Bank is correct, then almost all of them will either return to their jobs or find work elsewhere as the Job Retention Scheme comes to an end next month. But the unexpectedly strong bounce-back in economic activity is generating unexpectedly strong inflation.
Andrew Bailey, the Governor of the Bank, admits we should prepare for a squeeze on living standards this year and next as prices continue to rise faster than pay.
“Higher inflation is always painful and that's why we never want to see it,” Bailey told ITV News.
“That's why we've got to get through it. Manage it the best possible way to make sure its only temporary.” The surge in inflation has caught the Bank out. Three months ago it forecast that Consumer Price Inflation would reach 2.5% this year, it now thinks it will peak at 4%. Inflation is being driven higher by increased spending as the economy unlocks; by a surge in the price of oil and other commodities; by supply constraints - a global shortage of semi-conductors is restricting car production; and by an abundance of vacancies that many companies say they are struggling to fill.
Bank of England Governor Andrew Bailey says it is "critical" that existing job vacancies are filled
The mismatch between jobs and workers has grown starker as Covid restrictions have eased.
The problem is sectorial and geographical. Hotels, pubs and restaurants are heaving - away from city centres at least - but they complain they are struggling to recruit. “The labour market challenge is different today,” says Bailey.
“We’ve got a big increase in vacancies. It really is critical, from the point of view of inflation, that the job market works and that those vacancies get filled.” The Bank of England is betting that the upward pressure on prices will subside in the months ahead. The danger, of course, is if it doesn’t.
The fear is a wage/price spiral where higher prices prompt workers to demand higher wages, which leads to higher prices and so on.
If inflation starts to look persistent Bailey is clear that the Bank will have to act to slow the economy down by raising interest rates, sooner than would otherwise be the case. As it stands, markets expect that interest rates will begin to rise at some point next year. “I think that by any historical standard the path of interest rates will be very gradual,” Bailey says soothingly. Such reassurance depends on the Bank’s bet on inflation coming off.