The Bank of England governor has insisted that inflation has “turned the corner”, despite the UK being hit with the fastest annual growth in food prices since the 1970s amid the cost of living crisis.
Andrew Bailey said annual inflation was on track to fall sharply in the face of a recent drop in wholesale energy prices, coupled with the prospect of last year’s jump in gas and electricity bills for British households dropping out of the annual figure.
Speaking before the release of official inflation figures for April on Wednesday morning, Bailey told MPs on the Commons Treasury committee: “I do stand by the view that it has turned the corner.”
City economists predict that the latest snapshot from the Office for National Statistics will show a fall in the annual rate to 8.2%, as measured on the consumer prices index, down from 10.1% in March.
However, Bailey admitted that the central bank had “very big lessons to learn” after underestimating the impact of a series of shocks on the British economy including the Covid pandemic and Russia’s war in Ukraine.
Inflation in the UK has remained stubbornly higher than anticipated over recent months, sticking in double digits at the highest level in the G7 group of advanced economies. Critics have accused the central bank of being slow to react to steer inflation to its target of 2%.
Harriet Baldwin, the chair of the Treasury committee, likened the Bank’s failure to spot inflationary pressures to City figures missing warnings before the 2008 financial crisis. “I think you could’ve made the same error as bankers and traders did running into the financial crash,” she said.
Bailey admitted that the Bank underestimated the strength of Britain’s jobs market after the end of the furlough scheme, when it continued to hold interest rates close to zero as inflation accelerated. Its rate-setting monetary policy committee (MPC) was concerned about a potential increase in job losses – a fear he said was echoed by “pretty much every other [economic] forecaster” at the time.
“We hold our hand up and say that was a judgment we had to make and it didn’t turn out right,” Bailey said.
Silvana Tenreyro, an external member of the MPC, said acting earlier and more aggressively would have driven up unemployment, and would have only reduced the peak for inflation to 9%. Inflation in the UK peaked at 11.1% in October 2022.
Bailey said four successive shocks had hit the UK economy, leading to inflation soaring to the highest level since the early 1980s and sticking at persistently higher levels than anticipated.
Soaring prices for food, clothing and footwear had contributed to higher inflation than expected in March in particular, the governor said, while warning that it would take time for the pressure on households to recede.
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He blamed extreme weather events hitting vegetable harvests in Morocco and the production of sugar elsewhere around the world, as well as avian flu affecting poultry supplies. Farmers and food producers had also locked in high prices for energy and raw materials a year ago after the initial rise in costs after Vladimir Putin’s invasion of Ukraine.
“What was possibly underestimated was the degree to which food producers had purchased more forward, in terms of food prices, than they normally would do,” Bailey said.
Asked by the Labour MP Angela Eagle whether companies were adding to the pressure through “greedflation” – when businesses use the cover of high inflation to push through price increases – Bailey said some firms had been engaged in “rebuilding” their profit margins.
While suggesting that the largest contributor to food price inflation was last year’s increase in energy and commodity prices, the Bank governor added: “There are stories we hear about people buying forward for prices for longer, stories about energy costs. [But] our agents do pick up a story about margins. It’s a story about rebuilding margins that were squeezed, particularly last year.”
