UK Inflation More Home-Grown, Says BOE Deputy Governor

UK Inflation More Home-Grown, Says BOE Deputy Governor

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(Bloomberg) — UK inflation is becoming more “home-grown” and will be “challenging to squeeze out of the system,” according to Bank of England Deputy Governor Dave Ramsden.

Speaking in a Bloomberg TV interview from Hong Kong, Ramsden said monetary policy would have to stay “restrictive for an extended period of time” in order to get inflation back down from 4.6% to the 2% target. That’s despite forecasts which show a bleak growth outlook for the economy, with the 50-50 chance that it will dip into a recession. 

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Ramsden pointed out that headline consumer prices inflation is currently less than half of what it was a year ago. “But that’s been driven down by a bigger fall in the energy component than we were expecting,” he said. 

He explained that services inflation, which makes up 45% of the consumer basket used to calculate the CPI inflation number, was “actually much stickier and higher than we were expecting at 6.6%.”

“That’s really a sign that UK inflation is becoming much more home-grown,” Ramsden said. “We think that inflation is going to be really challenging to squeeze out of the system. It’s driven by wages, where wage growth remains above 7%. The service sector in the UK is very labor-intensive. So these factors are what’s leading us to think that inflation is going to stay stubbornly high through next year.”

The warning from the BOE comes just days after Chancellor of the Exchequer Jeremy Hunt announced a package of tax cuts in his Autumn Statement, in an effort to boost the Conservative Party’s popularity ahead of a general election expected next year.

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Some worry that the stimulus cuts will be inflationary. Ramsden said the BOE would look at the impact of the measures on the economy during its next Monetary Policy Committee meeting in December. 

(Corrects misspelling of surname in first graph)

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