Proactive Investors - The UK is “distinctive” in facing multiple inflation-causing challenges at the same time, said Bank of England chief economist Huw Pill in a speech.
Pill outlined that inflation in the UK, currently 10.7%, is being driven by tight labour markets, strong firm pricing power in the UK and US and the effects of the war in Ukraine.
“The UK is distinctive in facing all three of these challenges at the same time,” said Pill.
He added that the Bank’s setting of the current 3.5% interest rate was part of “a common process of monetary policy ‘normalisation’ after the long period of exceptional support,” seen during the 2008 financial crisis and the COVID 19 pandemic.
There were 1.2mln job vacancies in the UK as of October, down from 1.3mln in May, leaving employers offering higher salaries as a result, which has partially driven inflation rates.
Early retirements have played a part too, outlined Pill, with a higher number of 50 to 65 five-year-olds now inactive in the UK’s labour market, potentially due to long-term health issues stemming from the pandemic.
“Crucially, rising inactivity among the working age population represents an adverse supply shock, which adds to the difficult shorter-term trade-offs facing monetary policy,” he said.
Supply chain bottlenecks in the wake of the pandemic have driven inflation, Pill commented, while “additionally, Brexit weighed on UK trade with continental Europe, also serving to disturb supply chains and weaken competitive pressure on UK producers.”
A hike in the price of gas following the war in Ukraine has also caused an increase to fuel and food prices across Europe.
Pill added that while these challenges were not unique to the UK, the combination of all three were not being faced by many other countries.