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The Bank of England governor says Britain is facing a wage-price spiral

  • Bank of England Governor Andrew Bailey said in a speech on Wednesday that UK inflation was driven by “second-round effects” that would prove sticky.
  • He noted that the central bank’s monetary policy committee was closely monitoring “indicators of inflation persistence, including labor market tightness and wage growth, and service price growth.”
  • The BoE will continue to adjust the Bank Rate “as needed”[ads1]; to reach the 2% inflation target, he added.

A sign shows the price in pounds sterling of food items, including cucumbers, at a stall 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 says Britain is now experiencing a wage-price spiral despite 12 consecutive central bank rate hikes.

“Some of the strength in core inflation [in the U.K.] reflects the indirect effects of higher energy prices,” Bailey said in a Wednesday speech. “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 falls, these second-round effects are unlikely to disappear as quickly as they appeared.”

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

This situation risks a wage-price spiral – a theory that says workers bargain for pay rises when inflation rises, fueling higher demand and pushing companies to raise prices to compensate for steeper costs. This in turn leaves workers demanding higher wages to be able to afford goods and services – perpetuating so-called “second-round effects”.

The UK inflation rate surprised economists by staying above 10% in March. Core inflation, excluding food, energy, alcohol and tobacco, was flat at 5.7 per cent from the previous month.

Bailey said the loosening in 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 price growth in services had occurred in line with the bank’s forecasts. The Bank of England sees signs of a slowdown in wage growth but observes that services inflation remains high, Bailey added.

The Bank’s monetary policy committee “continues to judge that risks to inflation are significantly skewed to the upside,” he said, and will continue to adjust its main bank rate “as necessary” to reach its 2% inflation target.

Bailey suffered backlash last February when he said companies should show “restraint” in pay negotiations and that “broadly” workers should not ask for big pay rises. His comments were claimed at the time as callous, as the public faced a growing cost of living crisis, with inflation creating sharp falls in real wage growth.

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

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

Alberto Gallo, chief investment officer at Andromeda Capital Management, previously told CNBC that Britain was the developed economy most exposed to a wage-price spiral due to factors such as weakness in the British pound, reliance on food and energy imports and a tight labor market constrained by post-Brexit rules.

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

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

“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, either higher wages or passing on the cost of energy to customers.”

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

Still, he continued, “I appreciate that this is a bit of a harsh message, but … having to pay more for what we buy from the rest of the world compared to what we sell to the world is a squeeze on our purchasing power.”

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