Thursday 15 July 2021 2:26 pm

Inflation to soar to four per cent, warns BoE deputy governor

"I wouldn’t be surprised to see the whole inflation rate potentially rising as high as four per cent for a period later this year” - Ramsden (SOURCE: Bank of England)

The deputy governor of the Bank of England has warned that inflation could soar as high as four per cent, double the Bank’s target.

Sir Dave Ramsden said in a speech on Wednesday that he “wouldn’t be surprised to see the whole inflation rate potentially rising as high as four per cent for a period later this year.”

Sustained supply and demand imbalances as a result of firms struggling with severe supply chain disruption may not resolve anytime soon, putting upward pressure on prices in the long term, Ramsden warned.

The Bank of England expects inflation to peak at around three per cent – still above its target.

The comments come as the ONS’ latest Consumer Price Index shows inflation is already running higher than the Bank’s two per cent target.

Prices rose at their fastest annual rate in three years last month, up to 2.5 per cent in June.

The warning is the latest addition to a string of senior Bank staff publicly announcing they expect inflation to run hotter than the Old Lady’s forecasts.

In June, departing chief economist Andy Haldane said he thinks price rises will reach four per cent.

Michael Saunders, a member of the Bank’s monetary policy committee, said on Thursday that “CPI inflation will remain above the two per cent target 2-3 years ahead.”

Saunders warned that the emerging trend toward higher inflation could prompt the central bank to wind down its bond buying programme earlier than expected.

The Bank of England has highlighted that ample spare capacity in the economy is likely to quash inflationary pressures. It has also said supply and demand imbalances will ease as firms scale capacity over the coming months.

However, Ramsden said that spare capacity has eroded, meaning there is little room for firms to increase production without raising prices.

He also warned that the Bank may need to wind down its bond buying programme sooner than expected.

“Based on the rapid pace of developments since we published our May forecasts and the shift in the balance of risks, I can envisage those conditions for considering tightening being met sooner than I had previously expected” he said.