Monetary Policy Committee member Michael Saunders has said that, in his opinion, inflation may exceed the 10% peak forecast for Q4 2022 in the latest monetary policy report (MPR).

His statement comes from a speech given at the Resolution Foundation earlier today, 9 May.

In it, he explains that the MPR forecast assumes several economic factors, including weakness in spending, cuts in employee hiring – with unemployment rising – and supply chain problems easing.

As well as the headline-grabbing 10% number, this forecast expects inflation to fall to “slightly above” 2% two years later.

However, Saunders details a belief – a ‘hunch’, as he puts it – that demand will be more resilient than the MPR forecast calculates.

He explains: “For example, if consumers regard this year’s squeeze on real incomes as a one-off, they may be more likely to reduce their savings to a greater extent over the forecast period (supporting consumption).”

Saunders also says that supply constraints could be more persistent – “In particular, I suspect that workforce participation may well undershoot the MPR forecast, given the rise in long-term sickness and possible effects of Long Covid.”

This would keep employment levels stable (because firms would be hesitant to fire people) and so people would feel confident in spending their money.

“Such a scenario – continued tight labour market, elevated or rising longer-term inflation expectations – would, unless offset by tighter monetary policy, probably threaten to cause a more persistent inflation overshoot than the MPR forecast,” Saunders concludes.

These conditions, Saunders says, may also change inflation expectations for the next few years, regardless of what actually happens, meaning businesses would go on a high-inflation footing regarding pay growth and pricing.

He says that his preference as an MPC member is to move the bank “relatively quickly” towards a more neutral stance, “in order to prevent the recent trend of higher inflation expectations and rising pay growth from becoming more firmly embedded.”

The last time the public was asked about inflation by the Bank of England, 60% said they expect inflation to rise over the next 12 month, although 28% did say they believe this is best for the economy.