Britain must ensure inflation does not feed into wages, but a slowing economy should help cool price pressures, Bank of England policy hawk Andrew Sentance has said.
Markets scaled back rate hike bets after the comments on Monday from Mr Sentance – regarded as one of the most hawkish members of the Monetary Policy Committee – suggested the central bank is in no rush to embark on rate rises.
The Bank has said inflation could spike over four per cent as commodity prices rise, encouraging investors to bet interest rates are set to rise. But many economists argue rates will eventually need to fall as the economy weakens.
Mr Sentance said a weaker housing market and tougher conditions in the banking sector were adding to “economic uncertainties”.
“These factors should lead to much slower economic growth and a weaker labour market over the next year or so – helping to offset the upward pressure on inflation.” he said.
“Though we face upwards pressure from rising energy and food prices, the MPC is firmly committed to bringing inflation back to the two per cent target over a reasonable time frame.” Mr Sentance added.
“To achieve that, we will need to ensure that the rise in inflation injected by rising oil and commodity prices does not become broad-based. That requires that wage and price increases more generally do not pick up in response to a temporary episode of rising headline inflation.”
So far this year, however, Mr Sentance said there has been little evidence that inflation has affected wage deals.
“Pay settlements have been steady at around three per cent or four per cent since the early part of this decade, even though measures of inflation have fluctuated much more than this.” he said.
Official figures last week showed inflation rose to 3.3 per cent in May, the highest since the Government came to power in 1997 and the public’s perception of inflation is at record highs, raising fears that wage demands will spike higher.
Mr Sentance’s warning on wages echoed Chancellor Alistair Darling, who called on Sunday for pay awards to be kept in check to ensure they did not add to inflationary pressure.
“It’s important that we don’t allow inflation to become entrenched here at home,” the Chancellor said. “Pay awards in both the private and public sector have to be consistent with our inflation target, which is two per cent.”