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Bank chief warns inflation could persist as shoppers cut spending

·3-min read
Huw Pill warns of 'second round effects in prices, wages and costs' - Hollie Adams/Bloomberg
Huw Pill warns of 'second round effects in prices, wages and costs' - Hollie Adams/Bloomberg

The Bank of England’s chief economist has warned the economy could be on the verge of a painful inflation spiral, just as millions of families cut back on their weekly food shop to cope with soaring living costs.

Huw Pill, a rate-setter at the Bank, said a lack of workers and firms’ willingness to pass on higher costs to customers threatens to trigger a second wave of inflation.

Threadneedle Street’s chief economist warned of “second round effects in prices, wages and costs that exacerbate the magnitude and, crucially, the persistence” of high inflation. It raises the spectre of an inflationary spiral, where wages and inflation move ever upwards in tandem.

Mr Pill's comments came as recession fears were stoked by signs that consumers are tightening their belts. A slump in food spending drove a decline in overall retail sales in May.

Mr Pill hit back at criticism that the Bank of England’s huge bond purchases through quantitative easing have fuelled inflation, which hit a fresh 40-year high of 9.1pc in May.

In a speech in Germany, he said that shocks abroad, particularly higher global energy prices caused by the war in Ukraine, have pushed up prices rather than excessive money growth caused through Bank policies such as quantitative easing.

Mr Pill added that “the tightness of the UK labour market” and willingness of businesses to pass on higher costs could cause high inflation to linger. There are fears that employers chasing staff in the current low unemployment environment could offer higher pay, helping to trigger a wage-price spiral that keeps inflation elevated.

New figures from the Office for National Statistics revealed that 43pc of families are cutting back on their weekly food shop in the face of surging prices, up from 8pc in September 2021. Half of households are reducing their electricity and gas usage and 45pc are reducing their non-essential car journeys.

The deepening cost of living crisis was blamed by statisticians for a 1.6pc month-on-month slide in food sales in May. Overall retail sales dropped 0.5pc last month, while volumes slumped 4.7pc compared to 12 months ago. It was the second monthly fall in a row.

The retail sales slide adds to a dire set of economic figures for May, which have also included higher-than-expected borrowing and a new 40-year high for inflation.

Following the gloomy figures, economists warned that the retail sector was now in recession, intensifying fears of a wider slowdown.

Martin Beck from EY Item Club said the second half of the year would be a “challenging period for retailers, with consumer spending power under significant pressure from very high inflation and personal tax rises, and with confidence continuing to decline”.

He added: "The retail sector is effectively already in recession and the wider consumer sector is likely to experience a marked slowdown this year.”

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