Inflation shock on the cards for Britain

The Bank of England is expected to unveil the biggest price shock in more than a decade this week, after its latest monetary policy report revealed that its inflation estimate in May for the final quarter of the year was significantly below the real figure.

The Daily Telegraph reported that rather than 2.5 percent as predicted in the spring, the figure will be closer to 4 percent, which is likely to cause a split among the central bank's policymakers on what is the next best step to take for the United Kingdom's economy.

The bank is scheduled to make a policy announcement this week over its latest next move, and the future of its economic stimulus program.

Governor Andrew Bailey has said rising inflation is only a temporary concern, but Deputy Governor for Markets and Banking Dave Ramsden and Monetary Policy Committee member Michael Saunders expressed greater fears.

"If activity and inflation indicators remain in line with recent trends and downside risks to growth and inflation do not rise significantly, then it may become appropriate fairly soon to withdraw some of the current monetary stimulus in order to return inflation to the 2 percent target on a sustained basis," said Saunders in a speech made during an online seminar on July 15.

The gradual easing of lockdown over the last few months has led to increased economic activity, pushing up prices.

In addition, the furlough job support program continues its journey this month toward being wound down, currently scheduled for the end of September, with employers expected to pick up more of the bill for paying employees' wages as from August.

Doubts raised

Gertjan Vlieghe, another member of the monetary policy committee, was quoted by The Guardian as expressing doubts about the wisdom of raising interest rates to counteract inflation.

"We are not out of the woods yet in terms of the virus and the impact on the economy. Yes, the economy has been growing rapidly, but on the most recent data it remains an average recession away from full employment," he said in a speech at the London School of Economics.

Sanjay Raja, senior economist at Deutsche Bank, said the impact of the vaccine program meant now was a good time for a reappraisal of Bank policy.

"The balance of risks around the health outlook lean toward some removal of emergency pandemic policy support over the next year," he said.

George Buckley, chief economist at Nomura, told The Telegraph that price growth could reach as high as 3.8 percent by the end of the year, which would be the biggest jump in a forecast figure from the Bank since August 2009, when the world was still dealing with the aftermath of the global economic crisis.