The Bank of England’s chief economist said on Monday that he regretted blaming others for high inflation and for saying Britons “need to accept” they are poorer, but repeated that companies and households could not avoid being hit hard by higher energy prices.
Huw Pill generated what he described as a “viral response” last month when he said that in the UK “someone needs to accept that they’re worse off and stop trying to maintain their real spending power”.
In a webcast from the BoE on Monday, Pill said he regretted his choice of language. “If I had the chance again to use different words, I would use somewhat different words,” Pill said. “I don’t think the viral response has been very helpful for our communications.”
Pill said he recognised that the poorest families and smaller businesses had been hit hardest by the cost of living crisis over the past year and inflation rising to double-digits for more than six months, busting 40-year highs.
“I don’t think we’re looking to blame others [for the rise in inflation],” Pill said, and went on to explain why households and companies could not escape becoming poorer when natural gas prices rise.
The chief economist said he would try to bring “difficult messages . . . in a way that is less inflammatory than maybe I managed in the past,” adding that it was “important” to deliver such messages. He said he believed inflationary challenges should be addressed in a “coherent and robust way”.
Pill said that when the price of wholesale natural gas rose, it inevitably meant that national income would be hit, hurting households and businesses outside the energy sector. “That’s going to squeeze your spending power on everything else,” he added.
The BoE’s challenge, he said, was how to respond to the squeeze on incomes and the rise in inflation when it knew the effect of interest rate rises took time to filter through to the wider economy.
The biggest problem faced by the central bank, he noted, was an “incompatibility of a smaller pie for everyone” with households and companies “trying to maintain their level of spending before the pie shrunk”.
That was generating “more persistent, self-sustaining momentum in inflation” which would continue keeping the bank from achieving its 2 per cent inflation target “even as the initial rise in gas prices drops out”, he said.
Pill recognised that rising interest rates would intensify the squeeze on many households and companies finances but said “monetary policy is a very powerful tool, but a blunt tool” and it was necessary to slow spending to bring it into line with the worse economic outlook and higher gas prices.
The reason this was necessary, he said, was to stop inflation becoming stuck at 4 to 5 per cent rather than falling back to the BoE’s 2 per cent target.
“It’s precisely that that we want to avoid, because if inflation gets stuck at that [4 to 5 per cent] type of level, it will tend to carry on for a very long time.”
Source: Economy - ft.com
