By David Milliken and William Schomberg
LONDON – A current spike in prices is unlikely to create longer-term inflation pressures but central bankers should keep a close eye on job market shortages after the coronavirus pandemic, Bank of England Deputy Governor Ben Broadbent said on Thursday.
Splits have emerged among top policymakers at the British central bank on the need to remove stimulus for the economy, and Broadbent said he disagreed with the view of those such as Michael Saunders who fear above-target inflation will persist.
“While we know it’s going to go further over the next few months, I’m not convinced that the current inflation in retail goods prices should in and of itself mean higher inflation 18-24 months ahead, the horizon more relevant for monetary policy,” Broadbent said in a speech.
Saunders and Deputy Governor Dave Ramsden surprised investors last week by saying the time for tighter policy might be approaching.
But another MPC member Jonathan Haskel said reducing support for the economy was not the right option for the foreseeable future and Catherine Mann – who joins the BoE as a policymaker on Sept. 1 – warned against curbing stimulus too soon.
Financial markets currently price in a first rate rise by the BoE – to 0.25% from 0.1% – by June next year. Bond yields fell slightly after Broadbent’s remarks.
Last month, the BoE revised up its short-run inflation forecast in June to above 3% and it is due to release new – and probably higher – forecasts on Aug. 5 after its next meeting.
Broadbent said past spikes in British inflation to up to 5% caused by oil price rises or currency weakness subsided quickly.
Post-pandemic shortages of raw materials and components such as lumber and semiconductors were now easing and goods prices were likely to be pulling down on inflation rather than pushing it up in one or two years’ time, he added.
However, Broadbent said the pandemic’s legacy might worsen shortages of some types of worker, for example if accelerated digitalisation raised demand for software developers.
Very high levels of job vacancies, despite millions of workers still being on furlough, indicated at least a temporary mismatch between workers’ skills and employers’ needs.
“I’m more uncertain about this process, and the implication for costs in aggregate, than about the transitory nature of goods-price inflation,” he said.
Britain’s job market usually adapted fast to economic shocks and had not been a source of inflation pressure in the past but it was too soon to be sure this would continue, Broadbent said.
Recent data showing rapid pay growth was distorted by furlough support and other pandemic-related effects, he added.
“My best guess is that, stripped of these things, underlying pay growth is firmer than can be explained by the rate of unemployment alone. Labour-market mismatch could help to explain the difference,” Broadbent said.