A sign shows the price of food products in pounds sterling, including cucumbers, at a fruit and vegetable market in an east London stall on March 31, 2023.
Susannah Ireland | Afp | Getty Images
LONDON – After more than a year of warnings, the Governor of the Bank of England, Andrew Bailey, says that the UK is now experiencing an increase in the price of wages despite 12 increases in central bank interest rates.
“Some of the strength in core inflation [in the U.K.] reflects an indirect effect of higher energy prices,” Bailey said in a speech Wednesday.
“As core inflation falls, these second-round effects are unlikely to go away as quickly as they appeared.”
These areas of stability, he continued, include domestic wage growth and price conditions.
This situation is at risk of a price-wage spiral – a theory that says workers bargain for higher wages as inflation rises, stimulating higher demand and pushing companies to raise prices to compensate for higher costs. This in turn causes workers to have to pay higher wages to pay for goods and services – perpetuating “second round effects.”
The rate of inflation in the UK surprised economists by holding above 10% in March. Headline inflation, excluding food, energy, alcohol and tobacco, was steady on the previous month at 5.7%.
Bailey said that the release of the labor market, as vacancies begin to fall, is happening more slowly than the central bank 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 that wage growth is slowing, but maintains that services inflation is still rising, said Bailey.
The bank’s monetary policy committee “continues to judge that the risks to inflation are significantly shifted to the upside,” he said, and would continue to adjust its key bank rate “as needed” to reach their 2% inflation target.
Unique risks
Bailey hit back last February, when he said businesses should show “restraint” in pay negotiations, and that workers “in general” should not ask for a big pay rise. His comments were criticized at the time as out of touch, as the public faced a growing cost of living crisis, with inflation creating a sharp fall in wage growth in real terms. true
Economists and policymakers in the EU and the US have said in recent months that they no longer see significant risks of wage inflation in these economies, with wages having room to rise to rise to inflation and historical stagnation.
Many also say there are signs that companies have been raising prices above their 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 of a wage-price spiral due to factors including weakness in the British pound, reliance on food and energy imports and a tight labor market constrained by post-Brexit regulations.
Huw Pill, the Bank of England’s chief economist, stirred similar furore last month when he said on a podcast that Britain was reluctant to accept that “we’re all worse off, we all have to do our part ,” and that workers and companies had to stop pushing each other for price increases.
“If what you’re buying has gone up a lot compared to what you’re selling, you’ll be worse off,” said Pill.
“So somehow in the UK, someone has to accept that they are worse off and stop trying to maintain their real spending power by bidding up prices, whether it’s higher wages or pass on energy costs to customers.”
Addressing the backlash, Pill said in comments reported by Reuters earlier this week that he would “probably use different words. “
Nevertheless, he continued, “I realize this is a small message, but … stress on our spending power.”
