Inflation could spiral beyond 10% 

Michael Saunders, one of the Bank of England’s (BoE) Monetary Policy Committee (MPC) who voted for a larger 0.5 percentage point rate hike on 5 May, said key measures of long-term inflation were already “uncomfortably high”.

He warned the figure is likely to be “greater and more persistent” than the BoE’s central forecast of a peak slightly over 10% towards the end of 2022.

“I put considerable weight on risks that, unless checked by monetary policy, domestic capacity and inflation pressures would probably be greater and more persistent than the central forecast,” Saunders said in a speech at an event at the Resolution Foundation think tank.

Saunders was one of three MPC members who voted to raise rates to 1.25 percent on 5 May. The rest of the MPS were concerned that hiking interest rates too rapidly would risk depressing the economic recovery from the pandemic, and that the UK would slump into recession in 2023.  

Saunders case for bolder hikes was to prevent households suffer an even bigger squeeze on finances, as well as reputational risk for BoE if inflation becomes uncontrollable.

He said: "The strength of external costs is eroding real incomes and is likely to cap real spending. 

"But, by creating a long period of above-target inflation, these external cost increases also may exacerbate the rise in inflation expectations and hence, with the tight labour market, could make it harder to ensure domestic inflation pressures return to a target-consistent pace.”

He further warned that if monetary policy does not “adequately” tackle inflation, the bank could be forced for sharper adjustments to bring it back closer to its two percent target. 

High inflation until 2024
Former BoE chief economist Andy Haldane, separately warned high inflation could remain until 2024, and that it will be a “massive shock to the system” for a generation.

Now a government adviser, Haldane said inflation had “surpassed my worst expectations”, and was likely to surpass 10%. He also believed the BoE should have acted sooner than last autumn when hiking interest rates.

Haldane said: “Even this time last year I was worried that price pressures were bubbling up. As it turned out, things have even surpassed my worst expectations. We’re looking prospectively at double-digit inflation, which is not quite back to the 70s but getting on that way.

“And it’s not just that the level of inflation is high, I’m slightly fearful it might stick around. This won’t be come and gone in months. I think this could be years rather than months.”

Global inflation
Chief economist of the World Bank Group Carmen Reinhart said inflation will worsen inequalities between the richest and poorest countries.

Inflation caused by soaring global energy prices, consolidated by Russia’s invasion of Ukraine, will worsen the problem due to households in poorer countries struggling to cope with rising food prices, according to Reinhart.

“The lower income and emerging markets are getting bigger increases in food prices and, because poor countries spend a larger share on food, this has even bigger effects,” she said.

Reinhart called for policymakers to provide targeted support to the poorest, as she warned “inflation will be with us for a while.”