Mr Bailey said the BoE was concerned about the number of people retiring early. He said: “We should expect this to put upward pressure on inflation in a way that would call for a higher level of interest rates to dampen demand.”
He added that the rise in activity of people aged 50 to 64 was “particularly striking” as chancellor Jeremy Hunt tries to get more people back into work.
Mr Bailey said the UK’s workforce had shrunk during the pandemic, with a decline of around 132,000 people.
His comments follow concerns by the Treasury that higher economic inactivity could be holding back the economy.
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In order to encourage more people back into work, Mr Hunt unveiled several measures in his Spring Budget; this included scrapping a cap on the amount that can be saved in a pension pot.
Mr Bailey said the measures introduced by Mr Hunt were “very welcome” and that they were “addressing the right things”.
In recent months the Bank of England has tried to get inflation under control by raising the interest rate. After the latest rise, it currently sits at over four percent, its highest since the 2008 financial crash.
Despite the Bank’s actions, inflation currently sits at 10.4 percent, over five times its target and the highest rate of inflation in the G7 group of major economies.
In a speech given at the London School of Economics, Mr Bailey said inflation had risen at such a high rate because of several factors including post-Brexit changes, the COVID-19 pandemic, and Russia’s invasion of Ukraine.
He said: “These shocks have affected the UK economy in different ways, but they have eroded the terms on which we trade with the outside world.
“This has made us poorer as a country, manifesting itself in a rise in the prices we have to pay for the things we buy as consumers.”
During the speech, he added people retiring early was having an adverse impact on inflation.
He said: “The rise in economic inactivity is a change to the supply of labour, independent of demand, in particular by older workers. If those workers have accumulated enough savings to sustain a desired level of consumption much like the one they had before their early retirement, at least for a while, aggregate demand will not have fallen by as much as aggregate supply.”
He continued: “We should expect this to put upward pressure on inflation in a way that would call for a higher level of interest rates to dampen demand.”
As well as people retiring early, post-Brexit changes, the COVID-19 pandemic, and Russia’s invasion of Ukraine, another reason for the UK’s declining workforce is a condition brought about by the pandemic, long Covid.
It is believed close to two million people in the UK live with the condition, with thousands of patients unable to return to work due to their symptoms.
It adds to the list of factors which have influenced the size of the UK’s workforce.