Cost of living crisis is Sunak's problem to solve, Bank says

·4-min read
Rishi Sunak Andrew Bailey - Alex Kraus/Bloomberg
Rishi Sunak Andrew Bailey - Alex Kraus/Bloomberg

The Treasury must take responsibility for tackling soaring inflation and the cost of living crisis, the Bank of England’s chief economist has said after weeks of criticism of Threadneedle Street.

Huw Pill warned that Threadneedle Street cannot be seen as “the saviour for all possible events” and urged Rishi Sunak, the Chancellor, to set out his plans to tackle the crisis engulfing British consumers.

The comments are the clearest sign yet of a rift between the Treasury and the Bank as prices rise at their fastest rate for 40 years.

Mr Pill said that “the Bank of England doesn’t have a tool to offset the squeeze in incomes that’s coming” following a surge in inflation to 9pc last month, almost five times its 2pc target.

Asked about what support he could offer to households, Mr Pill said: “You should ask my friends, colleagues and counterparts at the Treasury. The ball is in their court.”

The Bank cannot be “the saviour for all possible events”, Mr Pill told Bloomberg, adding that independence is important to ensure policymakers can “be protected from political forces trying to make us do other things”.

Threadneedle Street has come under fire for repeatedly insisting that inflation would be transitory and raising interest rates too late and too slowly to prevent prices from surging.

Andrew Bailey, the Governor, insisted this week that most of the increase in costs was driven by factors such as food and energy bills that are climbing because of global forces beyond his control.

Mervyn King, a former Governor, said the failure to anticipate the sharp rise in inflation risks a return to the 1970s when prices ran out of control.

Speaking to Sky News, he said: “When you get an intellectual mistake in policy, and you allow inflation to rise, if you're then hit by bad luck - which is what happened in the 1970s and is happening now – it becomes a very unpleasant outcome.

“It takes tough action. And it's not a pleasant period through which we're going to have to go.”

In a speech in Wales, Mr Pill said the situation will get worse before it gets better because of imported prices the Bank can do little to counter, in part due to Russia’s invasion of Ukraine.

He added that much of the pain will only be felt this autumn, when the energy watchdog Ofgem increases its price cap to take into account a further jump in prices. Inflation is expected to hit 10pc later in the year.

Mr Pill said: “Given the workings of the Ofgem price cap, the full impact of recent sharp increases in European wholesale gas prices will only be felt in most British household utility bills – and thus in UK consumer price inflation – in October.

“The inflationary impact of the war is therefore likely to be more drawn out in the UK than elsewhere – but prove no less substantial.”

Tackling the problem will require rises in interest rates, which the Bank increased to 1pc earlier this month, the highest since 2009.

Mr Pill said: “We still have some way to go in our monetary policy tightening, in order to make the return of inflation to target secure.”

It came as the Bank revealed that a boom in businesses created in bedrooms during the pandemic ensured the UK enjoyed a quicker recovery from the lockdown hit.

Typically, business creation rises in boom times and falls during recessions. However, the pandemic recession was unusual in boosting company creation as lockdown caused demand in the economy to shift dramatically, especially to online retail.

This only previously happened in the post-war recessions in 1919 and 1946 as “wartime production declined and private enterprise restarted”, the Bank said in a working paper.

Bank of England analyst Saleem Bahaj said: “Similarly, during the Covid-19 pandemic widespread lockdowns reallocated demand to sectors that complied with social distancing.”

Business registrations were at an average of 50,000 before lockdown and increased to 60,000 after March 2020 with solo entrepreneurs making up 60-65pc of the new firms.

A government spokesman responded to Mr Pill by saying the Treasury is already providing help.

He said: “We understand that people are struggling with rising prices, and while we can’t shield everyone from the global challenges we face, we're supporting British families to navigate the months ahead with a £22bn package of support.

“That includes saving the typical employee over £330 a year through a tax cut in July, allowing people on Universal Credit to keep more of the money they earn – benefiting over a million families by around £1,000 a year, and providing millions of households with up to £350 each to help with rising energy bills.”