By David Milliken
LONDON (Reuters) -Bank of England Chief Economist Huw Pill said on Monday that Britain risked persistent inflation pressures from a tight labour market, even if natural gas prices stabilise or fall.
“The distinctive context that prevails in the UK – of higher natural gas prices with a tight labour market, adverse labour supply developments and goods market bottlenecks – creates the potential for inflation to prove more persistent,” Pill said in a speech to be delivered in New York later on Monday.
“(This) will strongly influence my monetary policy position in the coming months,” he added.
The BoE released a text of Pill’s comments ahead of the speech he plans to give to the Money Market Association of New York University.
The Bank of England raised its main interest rate to 3.5% in December, up from 0.1% a year before, and financial markets expect the central bank to raise rates again to 4% at its next policy announcement on Feb. 2.
Economists and markets are split, however, on how much further rates will rise beyond that. Inflation has fallen slightly since hitting a 41-year peak of 11.1% in October, and Britain’s economy appears to be entering a shallow recession.
Pill said that even if there was an easing in natural gas prices, the main driver of the most recent surge in inflation, that was no guarantee that underlying price pressures would fall enough for inflation to return to the BoE’s 2% target.
Businesses and workers needed to accept lower inflation-adjusted profit margins and wages than before the energy shock, Pill said.
“The longer that firms try to maintain real profit margins and employees try to maintain real wages at pre-energy price shock levels, the more likely it is that domestically-generated inflation will achieve its own self-sustaining momentum,” Pill said.
Britain is currently facing a wave of strikes as trade unions seek to minimise the impact of inflation on their members’ pay.
(Reporting by David MillikenEditing by William Schomberg and William James)
