Bank of England chief economist Andy Haldane warned central bankers around the world to keep an eye on prices as he compared inflation to a “tiger” that has been woken up and could prove difficult to tame.
He said a post-lockdown surge in demand could mount pressure on coronavirus-hit economies, particularly the UK, which has endured about a year of movement restrictions.
Calling inflation a tiger whose tail central banks control, Mr Haldane said it had “been stirred by the extraordinary events and policy actions of the past 12 months”.
“The Covid crisis has resulted in an unusually high degree of uncertainty about the future path of inflation,” he said.
“We might see a sharper and more sustained rise in UK inflation than expected, potentially overshooting its target for a more sustained period, as resurgent demand bumps up against constrained supply.”
Britain’s main inflation rate is currently below 1 per cent but the BoE expects it to reach 2 per cent by the first quarter of 2022, before settling slightly above that thereafter.
Mr Haldane said it was right for analysts to urge central banks around the world to be cautious about “acting too conservatively by tightening policy prematurely”.
“But, for me, the greater risk at present is of central bank complacency allowing the inflationary [big] cat out of the bag,” he said.
While global economies typically take years to emerge from recessions, Mr Haldane said the Covid-19 crisis was different as many households and companies had built up cash reserves during a series of lockdowns that prevented spending.
For example, people in the US now have excess savings of about $1.5 trillion, with the eurozone figure at about $500 billion.
“In the UK, the picture is much the same. Excess savings currently total around £150bn [$209.3bn] for households and over £100bn for companies, with the lion’s share of these savings in highly liquid bank deposits,” said Mr Haldane.
“This leaves money growth, or accumulated liquid savings, in a very different position than at the time of the global financial crisis.”
While Mr Haldane said it remained unclear how much of those savings would be spent after the lockdown, the Monetary Policy Committee gave a conservative estimate of about 5 per cent, something Mr Haldane expects to raise the willingness of households and companies to take risk.
Unlike the global financial crisis, which affected consumer spending for a sustained period, leading to long-term scarring on both the demand and supply sides of the economy, Mr Haldane expects the behavioural response after the pandemic to be very different.
“People’s appetite to spend and socialise has been artificially suppressed. This increases the chances of an overshoot as restrictions are removed, as after previous episodes of suppressed animal spirits. Risk-switching is, for me, more likely than risk-scarring,” he said.
However, weak investment during the pandemic could hamper the economy’s capacity to meet a surge in demand, which in turn could lead to higher inflation.
As a result, Mr Haldane said the BoE must be prepared to tighten monetary policy, which could lead to the regulator raising interest rates or reining in quantitative easing.
“For me, there is a tangible risk that inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” he said.
BoE governor Andrew Bailey said on Friday that he expects an economic contraction in the first quarter. However, the pace of Britain’s vaccination programme offers hope that Covid-19 restrictions will be lifted soon.