Chief economist of the Bank of England, Huw Pill, said the question of whether those who left the workforce during the pandemic will return is one of the biggest unknowns facing the UK economy as he indicated that interest rate rises still have some way to go in efforts to bring soaring inflation back to the central bank’s 2% target.
Cardiff-born Mr Pill, who took up his three-year term as the bank’s chief economist last September, voted in line with the Monetary Policy Committee’s majority position to increase rates by 0.25% to 1% earlier this month.
With the impact of soaring energy and food costs – which following supply chain issues caused by Covid have been exacerbated by the Russian invasion of Ukraine and a new wave of pandemic lockdowns in China – inflation, currently at 9%, is forecast by the central bank to reach 10% by year end.
There has been criticism, particularly from some Tory MPs, that the bank should have moved earlier on interest rates to subdue inflationary pressures and even voices calling for the ending of the bank’s independence from government after 25 years.
Mr Pill said: “I think it is right that we are judged to some extent on outcomes and the current outcome on inflation, given our target (2%),is very uncomfortable for us. Of course outcomes are always dependent on what you do. However, I think what has driven inflation up has largely been external shots, so high energy prices, notably oil and gas , and also higher prices of goods which have come from supply chain disruptions and so forth.”
While there can be no certainty, Mr Pill said he is confident that the rate of inflation with come down, with the bank forecasting it return back towards target in 2023-24.
Mr Pill said: “In our forecast we are assuming that commodity prices are going to stabilise and base effects will kick in.
“But we cannot be complacent and assured that is the case, because those things are very difficult to forecast.
“However, there are lots of reasons to think why they might come down.
“If you look at what financial future markets are pricing, and these are people with money on the line so you would think they would have a good incentive to interpret the information properly, they are forecasting that gas and oil prices will come off over the next two to three years.
“If that is the case then we will see inflation fall even further than our forecast.”
He added: “In this tight labour market, wage demands and settlements are strong, because people are trying to catch up with inflation we have already seen.
“So, what we are hoping and expecting, as the headline inflation turns over, not only does that bring headline inflation down mechanically, but it eases some of the wage pressure as people don’t feel under the same pressures to catch up.”
The economist said there was a balancing act that the MPC had to perform in that too little action on interest rates might allow inflationary pressures to become embedded in the economy, while moving too aggressive there was a danger of stifling economic growth.
Mr Pill said: “When you think about that in terms of policy too much runs the risk that you fall into and get stuck in a deep recession, which is very costly and too little you run the run risk that inflation gets this self-sustaining momentum and runs away from the target.
“So the challenge for us on the MPC is to find that path on rates...that allows us to keep on track and get back to 2% inflation.”
He said is was crucial to achieve 2% inflation sustainably.
He explained: “Where sustainably I think means medium-term orientated, but also sustainably in the sense that you haven’t put the economy into a sort of comatosed state. So, it is that balance that has to be kept.”
“That balancing, due to inflation running hotter, resulted in a further 0.25% in the base rate from the MPC in its May decision.
Mr Pill said: “I personally think there is more that needs to be done in this transition from what has been a very supportive monetary policy for the economy really going back to the financial crisis, through the fallout from Brexit and the pandemic.
“And we need to go not necessarily to a super restrictive stance, but to a stance that takes some of that support away and is more reflective of the fact inflation is higher and labour markets tighter and so forth.
“That is a process of a transition from one view of monetary policy to another view that has started. We have done quite a lot and started raising rates, have stopped buying assets, and started running down the assets, but I think it has got further to go and that is why I would expect to see over the coming months some further moves in the direction we have been seeing.”
UK labour market
According to latest figures from the ONS, while the UK unemployment rate is at its lowest rate since the early 1970s – with more jobs vacancies than those seeking work in the economy – hundreds of thousands of people have left the labour force since the pandemic.
While welcoming the fall in unemployment Mr Pill said: “It is important to see that this tightening (labour market) also reflects the fact that many people have left the labour market.
“A key question for us is are they going to come back and behind that is also the question of why did they leave?
“There was a pool of basically young people, who in the face of the pandemic decided to stay in education because they couldn’t get jobs.
“That was natural and we are seeing those people coming back.
“However, there is another pool of people, who if you like decided to retire early or earlier than they might have otherwise done. I think that is a pool of people who have moved from employment directly into inactivity.
“Now historically people who move from employment into inactivity tend not to come back. So, that is little bit of a source of concern for us.
“The open question though is historic behaviour, which wasn’t obviously in the context of a pandemic, a good guide to behaviour in the last couple of years?
“On top of that, and this is something we will look into quite carefully, is the extent to which people have moved because they are reporting long-term sickness.
“So, there is a direct issue there which is long Covid, but I think also around that is people who don’t have long Covid but have health conditions, which in the past they didn’t think were impediments to going to work.
“However, in a Covid environment they are feeling more vulnerable, so they may not come back. Also the ways of working is evolving.
“Do we expect to see those ways of working accommodate the fact that people want more flexibility and the ability to work from home and how does that effect things?
“So, I think there is quite a lot up for grabs there and I think trying to understand that is pretty key and difficult in terms of what the outlook for the labour market actually is.”
Mr Pill attended Whitchurch High School, in Cardiff.
The school’s alumni include footballer Gareth Bale, rugby player Sam Warburton and Tour de France winning cyclist Geraint Thomas.
While having spent most of career in Germany and the US, you can still detect a Cardiff tinge to his accent.
He said: “I did O-levels and then maths, physics and chemistry for A-level at Whitchurch.
“I didn’t study economics or consciously think that I one day I would be the chief economist of the Bank of England.”
Laughing, he added: “If I had though that as a 15-year-old I would have been more worried about myself. However, when I was appointed to this role my name was in the media and I got a lot af e-mails, including one from a guy I went to primary school (Eglwys Newydd) with.
“He said when we were nine or 10 years old the teacher had asked us a what we wanted to do when we were grown up type of question. He claimed, but I don’t recall, that I said I wanted to be an economist.”
His parents still live in Whitchurch. Mr Pill said: “I do come back to see my them when I can and for things like rugby matches.
“There is a tendency for people to feel more Welsh when then are not in Wales and I think there is a element of me that subscribes to that.”
