A full EU embargo on Russian energy supplies will push inflation in the UK even higher than the 40-year high it is on course to set, the Bank of England’s chief economist has said.
Speaking to CNBC, Huw Pill said there are ‘upside risks’ to consumer prices if the European Union steps up its efforts
The BOE expects inflation to peak at 10.2% in October, the highest since 1982. This assumes energy costs stabilize, but this could be jeopardized “if we were to see gas embargoes and Russian oil,” Pill told CNBC.
The EU has drawn up plans to phase out all imports of Russian oil by the end of the year and pressure is mounting for it to also sanction gas imports. There are further fears that Russia may decide to turn off the taps to force the West to the negotiating table over the war in Ukraine.
Pill added that the tight UK labor market posed an additional risk to inflation. Wages rose much faster than the BOE forecast just three months ago, and Pill said domestically generated inflationary pressures could build.
“We’ve been surprised by the strength of the labor market – and expect it to tighten further,” Pill said. “So there are second-round effects. There is a risk that inflation will become more self-perpetuating – and that is something we need to guard against.”
He dismissed comparisons with the stagflation of the 1970s, despite the BOE forecast showing double-digit inflation and stable growth for two years.
“We’re not heading in that direction,” Pill said. “The reason is that the monetary framework – introduced 25 years ago – has been transformational” and policymakers are now adept at spotting and fighting inflation.
The BOE gained operational independence over monetary policy, with a clear inflation target, in 1997.