Bank of England Deputy Governor Ben Broadbent said that 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.
Splits have emerged among top policymakers at the British central bank on the need to remove stimulus for the economy. Broadbent said that he disagreed with the view of those such as Michael Saunders who fear above-target inflation will persist. He gave a speech stating that while they know it’s going to go further over the next few months, he is 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.
Saunders and Deputy Governor Dave Ramsden surprised investors by saying the time for tighter policy might be approaching. But another MPC member Jonathan Haskel said that reducing support for the economy was not the right option for the foreseeable future. Catherine Mann who joins the BoE as a policymaker warned against curbing stimulus too soon. 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.
However, Broadbent said that the pandemic’s legacy might worsen shortages of some types of worker. 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. He added that he is more uncertain about this process, and the implication for costs in aggregate, than about the transitory nature of goods-price inflation. 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. His 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.