Tue. Dec 7th, 2021

Inflation could surge above 5% early next year in the United Kingdom, according to the Bank of England’s top economist, as product and labor shortages continue to hamper the country’s economic recovery.

“I would not be shocked — let’s put it that way — if we see an inflation print close to or above 5% [in the months ahead],” Huw Pill told the Financial Times. “And that’s a very uncomfortable place for a central bank with an inflation target of 2% to be.” Pill declined to reveal how he would vote at the Bank of England’s next meeting on November 4, but he said that the question of whether policymakers should hike interest rates from 0.1% is “live.” Central banks use interest rates to keep inflation low and stable.

Inflation has been running near 3% in the United Kingdom as the country’s economy bounces back from a steep contraction in 2020 caused by the coronavirus pandemic. But there are signs the recovery is faltering, even as inflation remains stubbornly high. The latest worrying signal came Friday, when the Office for National Statistics said that retail sales volumes fell for a fifth consecutive month in September. That’s the longest streak of consecutive declines since records began in 1996. Non-retail spending was also weak.

Economists worry that the United Kingdom may be entering a period of “stagflation” characterized by weak economic growth and rising prices. “The whiff of stagflation is greater in the UK than in most other economies and we now think temporary shortages will restrain GDP for longer and boost inflation by more than we previously thought,” Capital Economics analysts wrote this week. “This won’t be anywhere near as severe or as persistent as in the 1970s,” the analysts said.