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Economic growth is running out of steam and inflation is heading towards boiling point. When the Bank of England’s rate-setters meet this week, there will be contrasting warning signs to consider.
With the most serious disruption to business supply chains since the 1970s, the recovery from last winter’s lockdown has virtually stalled. Businesses are struggling to recruit staff to run the tills, raw material costs have risen, and energy prices have hit record highs. All of this threatens to fuel higher inflation this fall, after the consumer price measure of annual inflation jumped a record high in August to 3.2%.
At the same time, prophecies of a post-lockdown consumer spending boom made earlier this year seem out of place, with the Delta coronavirus variant raising infection rates ahead of a potentially very difficult winter.
For many economists, there is a whiff of stagflation in the air, reminiscent of the 1970s – the last time the world economy experienced slow growth rates in tandem with high inflationary pressure.
With this, the Bank’s policymakers face a dilemma: Do the conditions justify an increase in interest rates to tame the inflationary beast, or would an increase in borrowing costs further hurt the faltering economic recovery? Covid-19?
Threadneedle Street has so far been cautious, arguing that the post-containment inflationary explosion will prove to be transitory. And he does it with good reason. Behind our current spike in inflation lies the natural history of recovery after a record collapse in economic activity in 2020. Rishi Sunak’s catering program reduced the cost of restaurant meals in August 2020, which means a return to relative normality in 2021 fueled an artificially high rate of inflation.
City economists expect the bank to maintain a cautious stance this week. However, attention will focus on signals from the Monetary Policy Committee (MPC) regarding the future timing and pace of tightening measures.
Investors in financial markets will also pay close attention to the US Federal Reserve when its rate regulators meet on Wednesday, during a busy week for global central banks.
Andrew Bailey, the Bank’s governor, blurted out last week that at the last central bank meeting in August, four MPC members felt the conditions were right to pave the way for rate hikes. interest.
Since then, two new faces have joined the nine-member rate-setting panel: Huw Pill, the former Goldman Sachs economist, who replaced Andy Haldane as the bank’s chief economist this month; and Catherine Mann, former chief global economist at Citibank.
Analysts expect the majority will agree the conditions are right to raise interest rates, although action to raise borrowing costs is still unlikely until at least the start. next year.
The UK economy is at a delicate point, with the end of holidays looming, as well as the biggest overnight reduction in social security – to universal credit – and an increase in national insurance. All of this will put pressure on household finances.
Despite falling unemployment and record vacancies, more than a million jobs are said to be still on leave. Economists believe the Bank will want to wait and see how the next few months play out.
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