The crisis choking Britain’s supply chains will delay the economic recovery until next year, Andrew Bailey has said, as the world’s most powerful central bank chiefs warned that disruption now posed a severe threat to global growth.
Standing alongside the Bank of England Governor, Jay Powell of the US Federal Reserve, Christine Lagarde of the European Central Bank and Haruhiko Kuroda of the Bank of Japan said that staff shortages, shipping chaos and surging fuel costs are likely to cause further disruption as winter draws near.
It came as the pound fell to its lowest level since December amid fears of stagflation in the UK, and Lord Wolfson, the veteran boss of Next, sounded the alarm over price hikes and shortages for shoppers this Christmas.
The supply chain disaster has been brewing for months, with inflation taking off, gaps appearing on shelves and a shortfall of 100,000 truckers sparking panic at the pumps.
Financial markets have moved forward their expectations for interest rate rises, predicting that central banks will be forced to act to stop inflation spiralling out of control despite the potential economic damage.
Mr Bailey warned that Britain’s GDP will now not recover to pre-pandemic levels until early next year, up to two months later than anticipated in August. The Bank previously expected output to make a full recovery by the end of 2021.
He said the Bank will keep a “close watch” on inflation expectations and the labour market for signs that temporary price pressures are becoming more persistent and dangerous.
Inflation could exceed 4pc this year
Speaking alongside the other three central bank leaders at a conference organised by the ECB in Sintra, Portugal, he said: “Monetary policy can’t solve supply side shocks. Monetary policy can’t produce computer chips, it can’t produce wind, it can’t produce truck drivers.
"What we have to do is focus on the potential second round effects from those shortages."
Mr Powell added: “It’s also frustrating to see the bottlenecks and supply chain problems not getting better, in fact at the margin apparently getting a little bit worse.
“We see that continuing into next year probably and holding inflation up longer than we had thought.”
Ms Lagarde said the major question for ECB ratesetters is “how long those bottlenecks will take to be resolved”, calling the disruption a key threat to growth. Meanwhile Mr Kuroda said the Japanese economy has been hit by factory closures in parts of Asia with high Covid rates over the past few weeks.
But all the central bankers agreed that price pressures will be temporary, even as inflation rockets past rate-setters’ targets and supply disruption shows no sign of abating.
Analysts warned that Britain’s stagflation crisis is set to intensify as fuel shortages dent the Government’s reputation for competence and put sterling under pressure.
Britain is facing a £16.5bn cost of living crisis as disposable incomes are slashed by the double whammy of higher energy bills and the increase in national insurance, according to Capital Economics. It warned the blow will cut GDP growth by 0.5 percentage points in 2022 as households tighten their belts in the face of rising costs.
The pound took further punishment on Wednesday, a day after its biggest fall for 12 months, to trade as low as $1.3426, down almost 0.8pc and closing in on a 3 cent drop this week.
The fall has taken sterling to its lowest level since December as investors seek safe haven assets amid rising concern about soaring natural gas prices and ongoing petrol shortages.
Jordan Rochester, an analyst at Nomura, said the pound was “losing its inflation credibility” as scenes of queues at petrol stations “suggest the Conservative Government is losing its reputation for competence”.
Valentin Marinov at Credit Agricole said: “Investors fret about the looming stagflation risks ahead that could scupper the UK economic recovery and force the [Bank of England’s Monetary Policy Committee] to reconsider its plans for policy normalisation.”
As the army was drafted in to help clear continued problems at petrol stations, Next warned that a lack of lorry drivers and warehouse workers could derail Christmas shopping deliveries and told customers to prepare for higher prices.
The retailer, which is considered a bellwether for the British high street, said an increase in shipping costs had pushed up prices by about 2pc for the six months to July 31.
It added that this is likely to continue into next year, with shop prices predicted to rise by about 2.5pc in the first half of 2022. Clothing prices are expected to increase by 1pc and homeware products by 6pc, with goods such as sofas and beds more expensive to import.
Despite reporting a surge in profits and sales, Next’s chief executive warned that "things may not be as good as they appear today", with higher costs and labour shortages likely to hold back demand in the months ahead.
Lord Wolfson, a prominent Brexiteer and Tory peer, demanded that the Government take a "more decisive" approach to the acute shortage of lorry drivers, saying that the current situation "was foreseen, and widely predicted for many months".
The company said deliveries are likely to suffer in the run-up to Christmas unless immigration rules are relaxed to allow it to hire temporary warehouse staff and drivers from abroad. However, it said that availability in stores will not be affected.
Lord Wolfson said: "[For] many of us who voted for Brexit, it had nothing to do with immigration. Ultimately, Britain gets to determine its own immigration policy, [Brexit] doesn’t decide what that immigration policy should be … it has to be a system that responds to skills shortages and particularly things like seasonal peaks."