The squeeze on British households from high inflation could be bigger 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 rate-setting monetary policy committee (MPC), said inflation was “uncomfortably high” as households come under pressure from soaring energy, food and fuel bills.
The independent economist, who voted for a bigger rise in borrowing costs last week than most of his MPC colleagues, said he was concerned that expectations for higher inflation could become entrenched for longer than hoped.
“Energy price squeezes are painful. They hit those on the lowest incomes worst,” he said.
His warning was echoed by Andy Haldane, the Bank’s former chief economist who now leads the Royal Society for Arts thinktank, who said high rates of inflation could stick around for “years rather than months”.
Haldane, who was among the most prominent economists to sound the alarm on inflation risks before he quit the Bank last year, told LBC radio station that he wished tougher action had been taken sooner.
Asked if inflation could rise above 10% or go even higher, he said: “It could. I fear it might … I’m slightly fearful, it might stick around for some little while as well. This won’t be come and gone in a matter of months. I think this could be years rather than months.”
Threadneedle Street raised its key interest rate by 0.25 percentage points to a 13-year high of 1% last week to combat soaring inflation, despite warning there were growing risks of a recession caused by the cost of living crisis.
The Bank said the measure for the annual rise in living costs could breach 10% later this year, but then was likely to fall back towards its 2% target within three years’ time as the economic shocks from Covid and the war in Ukraine gradually fade.
Saunders, who alongside two other members of the nine-strong MPC was in the minority calling for a tougher 0.5 percentage point rate rise, said it would be better to ramp up borrowing costs more aggressively now to stop persistently high rates of inflation in future.
“I put considerable weight on risks that, unless checked by monetary policy, domestic capacity and inflation pressures would probably be greater and more persistent than the central forecast,” he said in a speech at the Resolution Foundation thinktank.
Such a plan could help avoid more aggressive hikes to hit the 2% target in future, which “could be very costly in economic terms,” he said.
Saunders, who is due to step down from the MPC in August, said Britain’s economy was suffering from “a series of major shocks” from Brexit, the Covid pandemic and soaring energy prices, alongside longer-term effects from an ageing population.
Shortages of workers and a 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 jobs market was forcing employers to raise workers’ pay.
“Costs relating to Brexit appear to have played some role, although this effect has recently diminished as one-off cost increases start to drop out of the annual comparison,” he said.
Driven by unemployment at the lowest level in 40 years and record job vacancies, Threadneedle Street forecasts average wage growth will come close to 6% this year. However, this remains significantly below inflation, adding to pressure on workers, while average pay settlements are expected to fall back next year.
Haldane, who served as the head of Boris Johnson’s levelling up taskforce for six months between leaving the Bank and joining the RSA this spring, said there was a “better than evens chance” that Britain’s economy would fall into recession.
“We could find ourselves heading south rather than north,” he added.