Inflation and wages in Britain could both be pushed higher in the event of a sharp decline in the number of migrant workers coming to the UK after Brexit, Bank of England governor Mark Carney said on Monday (18 September).
A drastic drop in immigration following Britain's withdrawal from the European Union could lead to staff shortages, which would translate to higher wages and an inflation spike, at least in the short-term.
"Abrupt decreases in migration could result in shortages in some sectors that have become reliant on migrant labour, and contribute more materially to inflationary pressures," he said in Washington.
"Brexit could therefore ultimately have only a modest impact on prices in general equilibrium".
Figures released last week by the Office for National Statistics (ONS) showed Britain's unemployment rate hit a new low in the quarter to July 2017, while wages increased less than expected as they continue to lag behind inflation.
Average weekly earnings rose by 2.1% year-on-year, in line with the gain recorded in the previous month but below the 2.2% increase analysts expected.
When the impact of inflation is factored in, real weekly wages fell by 0.4%, both including and excluding bonuses, compared with a year earlier.
Carney added that, in the long term, high levels of migration were not responsible for subdued wage growth, but his speech is likely to have pleased pro-Brexit MPs, who have long campaigned for tighter immigration controls.
Business leaders have repeatedly voiced concerns over the impact a drastic drop in immigration would have on the British economy, and the number of EU workers arriving in the UK has slowed down in recent months.
According to data from the ONS, the number of non-UK nationals from the EU working in Britain rose by 126,000 to 2.37 million between April and June 2017 from the corresponding period in 2016, compared with a 242,000 increase a year earlier.
Meanwhile, the number of workers hailing from eight of the EU's most recent EU member states, including Slovakia, Poland and the Czech Republic, fell 1.1% year-on-year in the quarter through June.
The BoE governor's speech comes only a few days after Threadneedle Street officials suggested the Bank could hike interest rates, for the first time in a decade, as early as November. The move sent the pound surging to its highest level against the dollar since the day after the Brexit referendum, but the currency has since relinquished some of its gains after Carney highlighted interest rates would be hiked in a gradual manner.
Carney and the BoE are fully aware they are treading a very fine line, for while higher interest rates would come as a boost to the pound, they could also spell troubles for borrowers at a time when consumer credit, which covers personal loans, credit cards and borrowing for cars, is rising at just under 10% a year.