The Bank of England monetary policy chief said inflation is likely to go above 5% next spring, when the energy regulator Ofgem raises a price cap that affects millions of households.
The jobs market adjusts to changes in the economy brought on by the pandemic and will likely keep record high levels of vacancies, said Ben Broadbent, the central bank's deputy governor with responsibility for monetary policy.
He was watching for signs of a wage price spiral because of the uncertainty surrounding rising wage demands by workers trying to protect themselves against falling living standards.
Even without any decline in unemployment, wages could accelerate further if wage earners' expectations of future inflation rise in response, or if they seek compensation for the rises in the costs of living that have already occurred, according to Broadbent.
He said that inflation was on course to increase until at least April next year, when the price cap is due to be raised. He said that the aggregate rate of inflation is likely to rise further over the next few months and that there is a chance that it will be over 5% when the Ofgem cap on retail energy prices is adjusted.
He said that the recent jump in inflation for goods, particularly cars, due to a global supply chain squeeze, was likely to fade and reverse before a Bank rate rise would have an impact.
He said that he still thinks it is more likely than not looking a couple of years ahead, because we should think that these pressures on traded goods prices are more likely to subside than intensify. Broadbent said in his speech that the new Omicron variant could interrupt that process, depending on the effectiveness of existing vaccines against it and the severity of its health effects. We don't know yet. Broadbent was one of the seven members of the Bank's nine-strong monetary policy committee MPC who wrongfooted financial markets by voting to keep interest rates on hold last month.
Signals from the governor, Andrew Bailey, and MPC members, Michael Saunders and Sir Dave Ramsden, convinced investors that the central bank was poised to tighten policy.
Ahead of a meeting on 16 December, investors are pricing less than a 50% chance that the Bank of England will raise rates from 0.1% to 0.25%, due to the emergence of the Omicron variant and uncertainty about how long energy prices will remain high.
Saunders stated last week that he would vote to keep the base rate at 0.1%, because he said there could be special advantages in waiting to see more evidence on its possible effects on public health outcomes and hence the economy. Brian Hilliard, an economist at Soci t G n rale, said if even the most hawkish member of the MPC is signalling that there might be some value in waiting to see how serious Omicron turns out to be, then we should expect the other members to have similar concerns.