Omicron could keep inflation high for longer, says BoE policymaker

The emergence of the Omicron variant of coronavirus could mean inflation remains high for longer than expected if it prevents consumers switching their spending from goods to services and prolongs disruption to global supply chains, according to a Bank of England policymaker.

Catherine Mann, who joined the BoE monetary policy committee in September, has so far been one of its more dovish voices and voted with the majority to leave interest rates on hold at 0.1 per cent in November, despite surging inflation.

But her comments on Tuesday, at an event hosted by Barclays, suggest she shares some of the concerns of other MPC members that inflation could remain above the BoE 2 per cent target for longer than previously expected if the central bank fails to tighten policy.

The October consumer price index rose 4.2 per cent from one year earlier, as inflation reached its highest level in almost a decade.

Mann said that with information on Omicron only just starting to come in, it was “premature to even talk about timing” of any interest rate rise, let alone about the scale of the BoE’s first move.

The arrival of the new variant could hurt consumer confidence, resulting in slacker demand, and policymakers would need to examine a range of incoming data before deciding whether to act, she added.

But Mann also underlined the risk that Omicron could lead pressures on global supply chains to last for longer than had been hoped, such that the surge in goods prices recorded in recent months might not subside as early as the BoE’s November forecasts assumed.

Her warning echoed comments made by Jay Powell, the US Federal Reserve governor, who told lawmakers on Tuesday that rising Covid-19 cases and the new Omicron variant could put the economic recovery at risk and increase the uncertainty around inflation. He nonetheless signalled his support for a quicker withdrawal of the Fed’s massive asset purchase programme.

Mann said price pressures could be more persistent if countries pursuing zero Covid strategies, such as China, shut down manufacturing plants in response to the discovery of Omicron cases, causing a “bullwhip effect” to ripple through global supply chains.

In addition, consumers might continue spending on goods in preference to services if new risks around the virus made them reticent about going out.

“We expected the rotation away from goods to be an ingredient in the moderation of goods price inflation we see today,” said Mann. “If Omicron basically puts us back holed up in our houses . . . we may not be seeing that.”

Mann also pointed to several factors that could bring inflation down from its current high levels over the course of the next year, including the waning effects of US economic stimulus on global demand and an easing in shipping rates.

But she also said the UK labour market was “tight and expected to stay that way” and that policymakers were “very conscious of the prospects for the tight labour market to translate into wage inflation”.

Other MPC members, including BoE chief economist Huw Pill, have said more explicitly that the conditions now exist to justify a vote for higher interest rates, but have been careful not to give any indication of whether the first move will come in December, as markets expect, or later.

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