Evening Standard Comment: Is inflation here to stay?

·1-min read
The Bank of England will give its latest verdict on interest rates and the economy on Thursday amid a growing split among policymakers over the threat of soaring inflation as growth rebounds. (PA Wire)
The Bank of England will give its latest verdict on interest rates and the economy on Thursday amid a growing split among policymakers over the threat of soaring inflation as growth rebounds. (PA Wire)

Is inflation back for good? Economists predict the Bank of England’s monetary policy committee is likely to revise up its prediction of inflation, with a peak above three per cent this year.

Should these be proven right, it would mean that even NHS doctors and nurses would face a real-terms cut, in spite of their recent pay deal.

The big question facing policymakers is whether this bout of inflation will be fleeting, or if we will experience a more lasting rise in the cost of goods and services.

Governments around the world have spent trillions of dollars fighting the health and economic consequences of Covid-19. Meanwhile, central banks have largely kept interest rates low, while also pumping out trillions more in the form of quantitive easing.

Such largesse amid a massive recession was the right course of action. Without it, the economic impact of the pandemic would have been even more destructive.

Yet it has consequences. For consumers, price rises mean their wages stretch less far. Should inflation expectations set in, we could witness a spiral fuelled by greater demands from workers across the public and private sectors.

This would be dangerous, heap further pressure on government borrowing at a time interest rate rises may be on the horizon, all while testing Bank of England independence.

It is often said of an athlete in a rut that form is temporary, but class is permanent. Policymakers will be hoping that maxim does not hold for this round of inflation.

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