LONDON — Bank of England Governor Andrew Bailey, who has been warning for more than a year, said Britain is now experiencing a wage-price spiral despite 12 consecutive central bank rate hikes.
“Some of the strength of core inflation [in the U.K.] “This reflects the indirect impact of higher energy prices,” Bailey said in a speech on Wednesday, adding, “However, there are two major implications of the external shocks seen so far interacting with the state of the domestic economy. It also reflects the secondary impact.”
“Those second-round effects are unlikely to disappear as quickly as they appear, even if headline inflation falls.”
He continued that those tenacious areas include domestic wage increases and pricing.
This situation is at risk of a wage price spiral. The theory is that as inflation rises, workers bargain for higher wages, and demand increases, prompting firms to raise prices to compensate for higher costs. This makes workers need higher wages to buy goods and services, perpetuating the so-called ‘second order effect’.
UK inflation hovered above 10% in March, surprising economists. Core inflation, which excludes food, energy, alcohol and tobacco, was 5.7%, unchanged from the previous month.
Bailey said the easing in the labor market is happening more slowly than the central bank had previously expected as vacancies begin to fall.
He said non-inflation-adjusted nominal wage growth and service price inflation were in line with central bank forecasts. Bailey added that the Bank of England sees signs of slowing wage growth but sees service inflation remaining high.
He said the central bank’s monetary policy committee “continues to judge that risks to inflation are skewed significantly to the upside” and will continue to adjust main bank interest rates “if necessary” to meet its 2% inflation target. said.
inherent risk
Bailey drew a backlash last February. He said companies should show “restraint” in wage negotiations and workers should not “broadly” ask for large wage increases. At the time, his comments were criticized as irrelevant at a time when real wage growth was plummeting due to inflation and the public faced a growing cost-of-living crisis.
Economists and policymakers in the EU and the US have said in recent months that wages have room to rise to catch up with inflation and historical stagnation, and no longer see a significant risk of a wage price spiral in these countries. ing.
Many also say there are signs that companies are raising prices above input price inflation, which protects corporate profit margins.
Alberto Gallo, chief investment officer at Andromeda Capital Management, previously told CNBC that the UK has seen wages fall among the developed economies due to factors such as the weaker pound, reliance on food and energy imports and a tight labor force. said to be most at risk of price spirals. The market is constrained by post-Brexit rules.
Bank of England chief economist Hugh Pill also said on a podcast last month that the UK is reluctant to accept that “we are all in a tougher situation and we will all have to pay our share”. , and caused a similar uproar. Workers and businesses need to stop passing on higher prices, he argued.
“If what you’re trying to sell is significantly more expensive than what you’re trying to sell, you’re in a worse situation,” says Pill.
“Therefore, in the UK, somehow, it is difficult for someone to accept that their living conditions are worsening and try to maintain real purchasing power by raising prices, such as by raising wages or passing on energy costs to customers. I need to stop.”
In response to the backlash, Mr. Pill said in a comment quoted by Reuters earlier this week that he would “probably use slightly different language.”
Nonetheless, he continued, “I know this is a bit of a harsh message, but…compared to what we sell to the world, we are buying from the rest of the world. It sucks that we have to pay more for what we do.” It puts pressure on our purchasing power. “
