n a recent speech, Bank of England's chief economist Huw Pill outlined his concerns about the UK's persistent inflationary pressures.
Pill identified several factors that could contribute to persistent inflation, including higher European wholesale natural gas prices, tight labour market conditions, and goods market bottlenecks. He added that these factors will influence his monetary policy decisions in the coming months.
Persistent Inflation Risks
Pill notes that higher natural gas prices have already directly impacted household utility bills and indirectly impacted the production of other goods and services. Additionally, these higher energy prices squeeze household and corporate incomes, which could weigh on domestic demand and create self-sustaining inflationary dynamics.
The tight labour market in the UK, with a current unemployment rate at its lowest level since the mid-1970s, could also contribute to persistent inflationary pressures. Recruitment difficulties in a tight labour market have supported stronger underlying wage growth, which could lead to higher prices for goods and services.
Finally, goods market bottlenecks stemming from demand and supply developments could also contribute to persistent inflationary pressures. These bottlenecks have led to inflationary pressures in the tradable durable goods sector, particularly in the US.
Signs of Slowing Inflation
On the labour market, he said that "We are starting to see labour market indicators turn. Vacancies have stabilised and there are tentative signs they will fall from their historically high levels. Should economic slack emerge, and unemployment rises as the latest MPC forecasts imply, that will weigh against domestic inflationary pressure and ease the threat of inflation persistence,"
He also said, "wholesale natural gas prices may stabilize or even fall somewhat in the coming months – indeed, that is precisely what we have seen in recent weeks. This will have a mechanical moderating effect on headline inflation from the middle of next year, as the MPC has anticipated in its latest forecasts." This suggests the MPC expects some improvement in inflation due to stabilizing natural gas prices.
Additionally, Pill notes that "global goods price inflation has weakened somewhat, and that has passed through into UK core goods inflation." This could be seen as a sign that inflation is improving.
However, Pill also notes that "the end of the zero-Covid policy in China may have again increased the uncertainty surrounding supply bottlenecks." This could disrupt supply chains and lead to inflationary pressures.
Overall, Pill believes both positive and negative factors could impact the future of inflation in the UK. Given these persistent inflationary forces, Pill indicates that they will strongly influence his monetary policy position in the coming months.
The MPC has also indicated that if the data follows the expected outcomes in the November forecast, further increases in the Bank Rate may be necessary for a sustainable return of inflation to target.
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