While inflation has been a major concern among some economists in the United States, prices in Britain are also increasing more than forecast.
The Bank of England is set to meet on Thursday to decide what to do with interest rates and its asset purchasing program. The meeting follows a report that found inflation was 2.1% in May, a number that surpassed expectations of 1.8% and breached the central bank’s target of 2% inflation for the first time in nearly two years.
While the Bank of England is expected to hold interest rates at their record-low levels and maintain quantitative easing, the Monetary Policy Committee was split on if the bank should rein in its asset purchasing and signaled that tapering was on the horizon during its May meeting. The 2.1% number from May is a big jump from April’s 1.5% inflation.
The Resolution Foundation, a British think tank, has predicted that inflation in the United Kingdom will be higher than the central bank or the Office for Budget Responsibility has anticipated. James Smith, research director with the group, said that while he predicts inflation will be higher than expected, it will likely be temporary in nature.
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“With the U.S. experiencing the fastest rise in inflation in nearly half a century, and the U.K. also experiencing sharp increases, many people are getting increasingly worried about a possible price spiral,” Smith said. “While U.K. inflationary pressures are nothing like as stark as the U.S., we could still see inflation breaching 4% this summer — a figure well in excess of the OBR and [the Bank of England’s] expectations.”
This week’s Bank of England meeting comes a week after the U.S. Federal Reserve projected that it would begin raising rates by 2023, given the increasing inflationary pressure. The prediction sent stocks tumbling despite the Fed’s decision to maintain an interest rate target near zero for the rest of the year.
John Rosen, an adjunct economics professor at the University of New Haven, told the Washington Examiner that when inflation breaches expectations in the U.S. and the U.K., it is concerning. He said that while the central banks of the two countries don’t necessarily synchronize their monetary policies, he would be surprised if the Bank of England moved much earlier than the Fed in tightening.
“Partly because all of the economies in the West are pretty integrated with each other and coordinate with each other,” Rosen said during an interview.
He said that while inflation can be more or less intense in either the U.S. or the U.K., it would be unlikely for a “serious outbreak” of inflation to happen in one and not the other.
Bank of England Chief Economist Andy Haldane warned in February that an inflationary “tiger” had woken up. He has also encouraged policymakers to slash the bank’s asset-buying program by $50 billion, according to CNBC.
“The combined effects of unprecedentedly large shocks and unprecedentedly high degrees of policy support have stirred it from its slumber. In this environment, the tiger-taming act facing central banks is a difficult and dangerous one,” Haldane said.
Like the U.K., the Fed has set a target of 2% inflation and has vowed to keep interest rates near zero until full employment and the sustained inflation goal is achieved. The Fed has been raising its inflation expectations in recent months as prices increase but insists that the higher costs will be transitory as the economy bounces back from its pandemic-induced slump.
Last week, the Fed increased its end-of-the-year inflation projection from 2.4% to 3.4%, dropping to 2.1% in 2022 and holding steady at its 2% goal in the longer run. Consumer prices increased 5% for the year ending May, according to the Department of Labor. The higher-than-expected figures from the consumer price index mark the largest 12-month increase since August 2008.
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While the Fed and administration officials insist that prices will fall in the months ahead, some economists fear that inflation could linger longer than anticipated. JPMorgan Chase CEO Jamie Dimon recently said that there is a good chance that inflation might be more than transitory and revealed that his bank has been “effectively stockpiling” cash.
“I think we’re in for higher-than-expected inflation for at least a year or two, and that is a not-pleasant prospect,” Rosen told the Washington Examiner.
