With the Bank of England expecting surging inflation to hit 10 percent by the end of 2022, its governor, Andrew Bailey has warned that UK households face a “very big income shock”.
"[The inflation risk factor] that I am going to sound rather apocalyptic about is food," Bailey was cited by UK media outlets as saying.
The governor was giving evidence to the Treasury Select Committee amid criticism from senior Tories about his response to growing prices driven by inflation surging well past the government’s target of 2 percent.
As Bailey told MPs that the potential for further food inflation was a “major worry for his country and a major worry for the developing world,” he brushed off accusations from the Committee chairman, Mel Stride, that his Bank had been "slow off the mark" to raise interest rates.
The Bank of England's target is to get inflation to 2 percent on the Consumer Price Index. However, official figures expected on Wednesday are to show the annual inflation rate climbing above 9 percent, with the Bank of England warning of a further rise once the energy price cap is raised again in October.
“I don’t feel at all happy and it’s a bad situation to be in,” the governor said after MPs asked him why the Bank had not acted before December to prevent inflation from soaring by raising interest rates.
At its meeting ending on 15 December 2021, the MPC voted by a majority of 8-1 to increase Bank Rate by 0.15 percentage points, to 0.25 percent.
Facing parliamentarians, Bailey blamed a plethora of global factors for contributing to the escalating cost of living crisis. He insisted that 80 percent of them were out of his control and could not have been foreseen by rate-setters at the bank.
He cited post-pandemic supply chain disruptions and labour shortages, but conceded the Bank had underestimated the number of people who would leave the labour market after the threat of COVID-19 had receded. He also emphasised trade frictions with Europe after Brexit, saying there has been no evidence to change the Bank's opinion that the divorce from the EU would be bad for the UK's trade.
"We have built into our view of the future that there is a negative impact," said Bailey. He then addressed the crisis in Ukraine.
“I don’t think we could foresee a war in Ukraine. Another factor that we’re dealing with at the moment is a further leg of COVID-19, which is affecting China. We have seen a series of supply shocks coming one after another, and that’s unprecedented.”
As world wheat prices and UK diesel and petrol prices come close to reaching record levels, Bailey admitted the the impact of Western sanctions on Russia over its special operation to demilitarise and de-Nazify Ukraine.
Several countries have followed Washington and its NATO allies in enacting punitive measures against Moscow, despite the immense damage they cause to their own economies.
Besides the sanctions targeting Moscow’s energy imports, Ukraine and Russia represent 53 percent of global trade in sunflower oil and seeds, and 27 percent in wheat, according to the United Nations.
At least 20 countries have imposed restrictions on food exports, covering around 17 percent of calories traded globally, according to Bloomberg, “compounding the [food market] problem with protectionism.” Most recently, India invoked a decision to regulate wheat exports, directing them through government channels to tame domestic prices - something that cannot but affect global strains.
In parliament, Andrew Bailey also warned that unemployment was set to increase amid the inflation onslaught.
According to him, prices would eventually be brought down by a "shock" to real incomes which "will have an effect on domestic demand, and it will damp activity".
"I'm afraid it looks like it will increase unemployment," he added.