Unexpected supply and demand imbalance is behind high inflation forecast, says BoE chief

Bank of England Governor Andrew Bailey. Photo: Reuters
Bank of England Governor Andrew Bailey. Photo: Reuters

A high demand for goods in comparison to services, coupled with major supply bottlenecks, is why the Bank of England has forecast 4% inflation by the end of the year, said the bank’s governor Andrew Bailey.

Bailey was speaking at a hearing of the treasury committee, where he was asked if the bank’s "error" of predicting 2.5% inflation by the end of the year, which it later uplifted to 4%, could undermine trust in the bank’s ability to forecast inflation.

Bailey said the bank had thought “the underlying story of unbalanced demand” would gradually correct itself, and the failure of this correction is due to the persistence of COVID in a way the bank had not expected.

He also said there are global factors at play — there has been increase in worldwide demand particularly for goods and that has lead to upward pressure on commodity prices such as oil and metals.

He said the US Federal Reserve and the European Central Bank have experienced similar situations.

“We have got much stronger demand for goods over services. That is affecting world trade and causing serious shipping bottle necks and that is pushing up on goods prices particularly.”

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He is hopeful both commodity prices and the supply issues will “sort themselves out.”

“Commodity prices generally in history do reverse back to their main levels. For commodity prices to continue to push up inflation, they need to not just stay at a high level they have to keep gong up and we think that is unlikely”

Bailey also said the labour shortage in the country will improve once the furlough scheme ends this month.

Meanwhile Silvana Tenreyro, external member of the bank's monetary policy committee said in a report published today: "Forecasting has been uniquely challenging during COVID, in large part because the main determinant of the outlook has been the spread of the virus, rather than traditional economic drivers."

Back in July, Bailey had insisted that an increase in inflation will be temporary, warning policy makers against overreacting to a jump.

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