Bank of England Governor says UK faces price-wage spiral

  • Bank of England Governor Andrew Bailey said in a speech on Wednesday that Britain’s inflation was fueled by “second-round effects” that would prove persistent.
  • He noted that the central bank’s monetary policy committee was paying close attention to “indicators of inflation persistence, including labor market tightness and wage growth, as well as service price inflation.” “.
  • The BoE will continue to adjust its discount rate “if necessary” to meet its 2% inflation target, he added.

A sign displays the price in pounds of food items, including cucumbers, at a fruit and vegetable market in east London on March 31, 2023.

Susannah Ireland | AFP | Getty Images

LONDON – After more than a year of warnings, Bank of England Governor Andrew Bailey has said the UK is currently experiencing a wage and price spiral despite 12 consecutive interest rate hikes of the central bank.

“Some of the strength in core inflation (in the UK) reflects the indirect effects of higher energy prices,” Bailey said in a speech on Wednesday. “But it also reflects second-round effects, as the external shocks we’ve seen interact with the state of the domestic economy.”

“As headline inflation declines, these second-round effects are unlikely to disappear as quickly as they appeared.”

Those areas of persistence, he continued, include domestic wage growth and price fixing.

This situation risks leading to a wage-price spiral – a theory that workers negotiate for higher wages as inflation rises, fueling higher demand and causing companies to raise prices to compensate for higher expenses. . This in turn leaves workers needing higher wages to afford goods and services, perpetuating what are known as “second-round effects”.

Britain’s inflation rate surprised economists by holding above 10% in March. Core inflation, excluding food, energy, alcohol and tobacco, remained stable compared to the previous month at 5.7%.

Bailey said the loosening of the labor market, as vacancies begin to fall, is happening more slowly than the central bank had previously expected.

He noted that nominal wage growth – not adjusted for inflation – and service price inflation had occurred in line with the bank’s forecasts. The Bank of England sees signs of slowing wage growth, but observes that services inflation remains elevated, Bailey added.

The bank’s monetary policy committee “continues to judge that inflation risks are strongly on the upside”, he said, and would continue to adjust its main policy rate “if necessary” to achieve its objective. 2% inflation.

Bailey faced backlash in February last year when he said companies should show ‘restraint’ in wage negotiations and that workers ‘generally’ shouldn’t demand big pay rises. salary. His comments were criticized at the time as out of touch, as the public faced a growing crisis in the cost of living, with inflation creating steep declines in real wage growth.

Economists and policymakers in the EU and US have said in recent months that they no longer see significant risks of a wage-price spiral in these economies, with wages able to rise to catch up with inflation and historical stagnation.

Many also say there are signs that companies have raised prices above input price inflation, which has protected corporate profit margins.

Alberto Gallo, chief investment officer at Andromeda Capital Management, previously told CNBC that the UK was the developed economy most at risk from spiraling wages and prices due to factors including the weak pound sterling, dependence on food and energy imports and a limited labor force. market constrained by post-Brexit rules.

Huw Pill, the Bank of England’s chief economist, sparked similar fury last month, when he said in a podcast that there was a reluctance in Britain to accept that “we are all worse off we all have to do our part”, and that workers and businesses must stop passing on price increases to each other.

“If what you’re buying has increased a lot compared to what you’re selling, you’re going to be worse off,” Pill said.

“So somehow someone in the UK has to accept that they are worse off and stop trying to maintain their real purchasing power by raising prices, that whether it’s higher wages or passing on energy costs to customers.”

Addressing the backlash, Pill said in comments quoted by Reuters earlier this week that he would “probably use somewhat different words”.

Nonetheless, he continued, “I understand that’s a bit of a harsh message, but…having to pay more for what we buy from the rest of the world than what we sell to the world is a burden. on our purchasing power.

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