As the UK Chancellor announced measures to support those worst impacted by the current inflationary environment, attendees at the Pensions and Lifetime Savings Association (PLSA) Investment Conference in Edinburgh believe the situation would last for some time to come.

Some 52% responding to an audience poll predicted that inflation would stay above the Bank of England’s (BoE’s) target of 2% over the next three years. A further 44% believed it would be significantly higher.

Just 4% thought inflation would drop to below the target in the same period.

“Inflation is a persistent, not a temporary problem,” said Paul Mortimer-Lee, research fellow at the National Institute of Economic and Social Research, who added that once the cost of living measure began to rise, it was very tricky to stop the phenomenon.

Following comments by the BoE earlier this month that it was not to blame for the rocketing numbers, the panel said there were a number of contributing factors.

Kate Barker, chair of Universities Superannuation Scheme (USS) and trustee board chair of the British Coal Superannuation Scheme, outlined three key issues: “It’s quite hard to disentangle the effects […] Brexit has had an effect on our trade; on our labour market.”

She said the second was the impact of the pandemic, which many economists “got wrong”, estimating that there would be significant unemployment.

“We spent a lot of time worrying about that, but we’ve discovered people retreated from the labour force and actually […] the labour market is [now] very tight.”

The energy shock was the third element, which was likely to create secondary effects on the global and UK economy.

Barker, a former member of the BoE’s monetary policy committee, added that a fall in the globalisation trend also had an impact on prices in the UK and elsewhere. She cited the period when she was on the committee and said the key economic drivers at that time were no longer present.

”Inflation isn’t just going to drop with the oil price”

Keith Wade, chief economist at Schroders

“One is globalisation, which kept goods price inflation down,” she said, “and we were helped by a lot of labour supply coming into the European Union.”

Keith Wade, chief economist at Schroders, said the core rate of inflation outside of energy and food had also risen  significantly.

“That’s one of the big differences between this cycle and many others that we’ve had in the past. So inflation isn’t just going to drop with the oil price,” he said.

As monetary policy is designed to support economic growth and keep inflation under control, the panel agreed it was the only option now, yet they also predicted it was unlikely to make the necessary impact quickly.

They also agreed the UK economy was facing at least one recessionary period, as policymakers’ actions would hit growth.

“It is going to take a long time, and it may take more than one recession,” said Mortimer-Lee. “[Central banks] spent years telling us that inflation was unresponsive to the real economy, and that’s why they couldn’t get inflation up […] You’re going to have to cause quite a big recession to get rid of inflation.”

However, the panel were also more optimistic about the UK and global economy in the longer term.

Wade said both technology and the post-COVID approach to working and recruitment were relative bright spots on the horizon.

Even so, he added that there were risks around demographic change and a failure to invest in innovation that could derail a recovery.

Barker echoed the concern about a lack of investment in innovation, and was joined by Mortimer-Lee in urging investors to commit to funding more projects that would have a positive impact on UK economic growth.

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