The surge in people quitting the British workforce because of ill health or early retirement could force the Bank of England to further increase interest rates, its chief economist has warned.
Huw Pill said the departure of more than half a million workers from the jobs market since the Covid pandemic risked stoking inflationary pressures, long after the shock from sky-high energy prices is likely to fade.
In a speech to business leaders in London, he suggested the rise in economic inactivity – when working-age adults are not in a job or looking for one – could force a response from Threadneedle Street.
“Rising inactivity among the working age population represents an adverse supply shock, which adds to the difficult shorter-term trade-offs facing monetary policy,” he said.
Pill said the workforce exodus could further push employers to offer higher wages, amid near record job vacancies and the lowest levels of unemployment since the 1970s. This, in turn, could stoke inflation if firms pushed up their prices to accommodate higher wage bills.
“The labour market has continued to tighten and has proved tighter than we had expected, largely owing to the adverse developments in participation that we did not fully foresee,” he said.
The UK is lagging behind other advanced economies with employment still below levels seen before the Covid pandemic. Official figures show the number of people classified as economically inactive has risen by almost 630,000, driven by record levels of long-term sickness and growth in early retirement.
Economists, including Pill’s predecessor Andy Haldane, have warned Britain’s “missing” workforce is contributing to a weaker post-pandemic recovery in the UK than other nations, while questioning whether NHS backlogs and years of underinvestment in the health service could be playing a role.
Despite sounding the alarm over persistently high inflation, Pill said there were some signs the labour market was beginning to “turn” as the economy slides into recession, including a stabilisation of jobs vacancies from historically high levels.
“That will weigh against domestic inflationary pressure and ease the threat of inflation persistence,” he said.
He also said rates were unlikely to need to rise to levels priced in by financial markets before the central bank’s last decision on borrowing costs – which had implied rates peaking at about 5.25% late next year.
The Bank raised rates by 0.75 percentage points to 3% earlier this month, despite predicting that higher borrowing costs would push the economy into the longest recession since the 1930s.
However, Pill warned there was “still more to do” to raise interest rates to tackle inflation above 11% for the first time since 1981, with the aim of preventing high rates from becoming entrenched.
“Further action is likely to be required to ensure inflation will return sustainably to its 2% target over the medium term,” he said.
