Bailey: UK inflation to temporarily shoot to 2.5 percent

Bank of England governor Andrew Bailey expects inflation to rise above the two percent target to “around 2.5 percent” as the coronavirus-related restrictions end and the UK economy begins to bounce back.

However, he is confident that the factors driving inflation upwards are temporary and should recede once the economy enters a more normal period as the pandemic ends.

“We’ve got what I call this hump in the forecast,” Bailey told the Treasury Select Committee on May 24. “We’ve got inflation going up and then coming down again,” he added.

“We have got to watch this very carefully because while we haven’t seen any signs that inflation expectations are rising in a concerning way, if we started to see that or if we started to see these price increases becoming embedded, that is a cause for concern.”

Speaking alongside Bailey at the Treasury Committee was Michael Saunders, external member of the Monetary Policy Committee at the Bank of England, who agreed that the expected rise in inflation would likely be passing.

“It is likely that the swings in energy prices, if the recent pick up in oil prices is sustained, will produce a temporary period of above-target inflation,” he told the Treasury Committee.

Saunders explained that the central bank is relaxed about inflation because the economy is starting from such a “low base” after the shock of the pandemic and resulting lockdowns that began in March 2020.

“I don’t see evidence that the economy is recovering strongly enough to move into sustained excess demand – the recovery is just getting back to normal,” he added.

Bailey said it was still the Bank’s priority to offer as much monetary support as possible to the UK economy due to the delicate position that the country remains in.

“We do see this as a story of an economy that is still recovering,” he said.