The governor of the Bank of England, which has raised interest rates to a 15-year high, has said the UK labour market and not Brexit is to blame for stubbornly high inflation.
Andrew Bailey said the tight jobs market – with near-record low unemployment, more than a million jobs vacancies and wage growth of 7.2% – was the reason the UK inflation rate is higher than both the US and Eurozone.
The latest official figures show the consumer price index measure of inflation defied expectations and remained at 8.7%.
But that is not because of Brexit, Mr Bailey told the European Central Bank (ECB) forum on central banking on Wednesday.
Instead, he pointed to the number of people who left the workforce after COVID-19 and are classed as economically inactive – neither looking for nor in work.
He said: “I think more of it is to do with the response to COVID, frankly. We saw people come out of the labour force in COVID, other countries tended to see that reverse more quickly and more strongly than we’ve seen in the UK.”
There were a record number of people out of the workforce because they are long-term sick last year, according to data from the Office for National Statistics.
“We are seeing some reversal of that now but we’re still not back to where we were pre-COVID. That is causing our position in the labour market to be very tight,” Mr Bailey said.
A shrunken workforce has led to competition for staff and higher wages.
Many employers are retaining and planning to keep staff in the event of a downturn because of their concerns over recruitment, Mr Bailey said he has been told by businesses across the country.
Increased inflation means consumers facing higher prices, on everything from fuel to food.
On the potential for further interest rate rises, amid some market expectations this week that the base rate set by the Bank of England could reach 6.25%, Mr Bailey said: “Well, we’ll see.”
He added: “We can’t make promises about future interest rates but based on where we stand today, we think bank rate will have to go up by less than currently priced in financial markets.”
The bank has increased interest rates in an attempt to bring inflation down.
The ECB event was attended by the head of the US and UK central banks. Both Mr Bailey and ECB president Christine Lagarde said they discussed interest rate decisions.
“We do talk a lot and I think it’s important,” Mr Bailey said. “It’s particularly important at the moment because shocks are global… we do see each other quite a lot.”
The role of artificial intelligence at the Bank of England was also raised with Mr Bailey, who said the organisation is looking at how AI will affect the economy and how it can be used in its analysis and operations.
The bank is having to devote “quite a bit of time” to the potential of AI, he said.
“We’re looking at it with very open eyes,” he added. “You can see the strengths and the current weaknesses of it and of course it moves very rapidly.”