The booming UK labour market poses significant risks for the future path of inflation, even if the current surge in global goods prices is likely to abate, a senior Bank of England official said on Monday.
Ben Broadbent, a BoE deputy governor, gave no clear steer on whether he was inclined to vote for a rise in interest rates when the central bank’s Monetary Policy Committee meets this month.
Other MPC members have recently underlined the risks of persistent inflation but also held back from providing any clear indication of when they will vote to tighten monetary policy.
Economists expect a majority of MPC members will decide to keep interest rates at their historic low of 0.1 per cent on December 16, as they wait to assess the implications of the new Omicron variant of coronavirus.
Broadbent told an audience in Leeds that the BoE faced an “extremely challenging period for monetary policy”, with inflation set to climb “a long way north” of the central bank’s 2 per cent target despite a two-year period of weak global and UK economic growth.
The October consumer price index rose 4.2 per cent in the UK from one year earlier, as inflation reached its highest level in almost a decade.
Broadbent said the BoE could not have done anything to shield British households from the ongoing rise in living costs, because it was driven by a global surge in demand for goods, combined with disruption to supply chains as lockdowns in Asian countries hit production.
Even though some shifts in spending, linked to new homeworking habits, now looked likely to endure, the pricing pressures on traded goods were “more likely to subside than intensify” by the time any changes in monetary policy could take effect, he added.
But Broadbent struck a much more hawkish note on the risks to inflation posed by an unexpectedly tight UK labour market, with unemployment barely above its pre-pandemic rate and job vacancies at record levels even after the end of the government’s furlough scheme.
Higher public sector employment could be part of the explanation, he said. Even if some of this was temporary recruitment, government spending plans suggested that permanent hiring in the public sector was set to continue.
Broadbent said some of the strains in the labour market could be due to “the sheer speed of hiring”, in which case they would ease over time.
But there was also “an upside risk to wage costs from currently high inflation”, if workers demanded increased pay to offset the rising cost of living.
Broadbent said a temporary rise in the cost of imported goods rarely had much bearing on monetary policy, because usually the shock had passed before changes in interest rates had time to work.
But “the risks to future inflation from the tight labour market may well be more significant”, he added.