Economy

The governor of the Bank of England said that Britain was undergoing adjustments in wages and prices.

May 20, 2023

After more than a year of warnings, Bank of England Governor Andrew Bailey says the UK is now experiencing a wage and price spiral despite 12 consecutive central bank activity rate hikes.

“Some of the power of core inflation [in the UK] shows the oblique consequences of higher energy prices,” Bailey said in a speech on Wednesday. “But it also shows second-round results, as the external shocks we’ve seen interact with the realm of the domestic economy.”

“As headline inflation falls, these second-round results likely won’t go away as quickly as they appeared.”

These areas of persistence, he continued, consist of raising wages at home and fixing rates.

This scenario jeopardizes a wage-price spiral, an idea that says people get a good deal for a bigger wage as inflation rises, fueling higher demand and pushing companies to increase spending to compensate. the highest expenses. This, in turn, leaves people who require higher salaries to have the funds for items and deals, perpetuating so-called “second round effects.”

The UK inflation rate stunned economists by sheltering above 10% in March. Core inflation, except for food, energy, alcohol and tobacco, remained constant in the previous month at 5.7%.

Bailey said the easing of the job market, as job openings start to fall, is happening more slowly than the central bank previously anticipated.

He said the nominal wage increase, which is no longer adjusted for inflation, and offer rate inflation had passed in line with the bank’s forecasts. The Bank of England sees signs of a slowdown in wage growth but notes that bid inflation remains elevated, Bailey added.

The bank’s hedge committee “continues to view inflation risks as skewed notably to the upside,” he said, and would continue to adjust its main bank charge “as necessary” to meet its 2% inflation target.

Bailey suffered a backlash in February of last year, when he said agencies should show “restraint” in salary negotiations and that “in general” people should no longer ask for big pay raises. His comments were criticized at the time as misplaced, as the public faced a growing cost-of-living crisis, with inflation causing sharp declines in wage increases in real terms.

Economists and policymakers in the EU and US have said in recent months that they no longer see great dangers of a wage and price spiral in these economies, with wages having room to push higher to offset inflation and the old stagnation.

Many also say there are signs that companies have been raising expenses above their entry rate inflation, which has included company revenue margins.

Alberto Gallo, chief financing officer at Andromeda Capital Management, previously told CNBC that the UK was the developed economy most exposed to a spiral of prices and wages due to elements including a weakness in sterling, reliance on imports of food and energy and a tight labor market constrained by post-Brexit rules.

Huw Pill, chief economist at the Bank of England, sparked a similar furor last month when he said on a podcast that there was a reluctance in Britain to accept that “we are all worse off, we all have to take our share”, and that people and the companies wanted to stop passing the rate increases on to each other.

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

“So, one way or another in the UK, everyone wants to know that they are worse off and to stop trying to maintain their actual electricity bills by raising prices, either through higher wages or by shifting electricity prices to customers. .”

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

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