Bank of England governor says UK faces wage-price spiral


A sign displaying the price in pounds sterling of food items including cucumbers at a fruit and vegetable market stall 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 the UK is now experiencing a wage-price spiral despite 12 consecutive central bank cuts. interest rate hike,

“Some strength in core inflation [in the U.K.] “Illustrates the indirect effects of higher energy prices,” Bailey said in Wednesday’s speech. “But it also reflects second-round effects as external shocks interact with the state of the domestic economy.”

“As headline inflation falls, these second round effects are unlikely to go away as quickly as they appear.”

These areas of strength, he continued, include domestic wage growth and pricing.

This condition is a risk salary-value spiral – A theory that says that rising inflation causes workers to bargain for wage increases, promoting higher demand and prompting companies to raise prices to compensate for faster spending. This in turn requires higher wages to afford goods and services to workers – maintaining the so-called “second round effect”.

UK inflation rate had surprised economists by holding above 10% in March. Core inflation excluding food, energy, alcohol and tobacco was steady at 5.7% last month.

Bailey said Loose As vacancies in the labor market begin to shrink, that is happening more slowly than previously anticipated by the central bank.

He noted that the nominal wage increase – not adjusted for inflation – and service price inflation were in line with the Bank’s forecast. Bailey said the Bank of England sees signs of a slowdown in wage growth, but sees services inflation remain high.

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

unique risk

Bailey faced criticism in February last year when he Said Businesses should show “restraint” in wage negotiations, and that workers “broadly” should not demand large wage increases. His comments were out of touch at the time, as the public faced a rising cost-of-living crisis, with inflation followed by a sharp decline in real wage growth.

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Economist and policy maker in the European Union and the US have said In recent months that they no longer see significant risks of a wage-price spiral in economies that have had room for wage growth to rise with inflation and historic stagnation.

Many also say that there are signs that companies are 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 The UK was the most at-risk developed economy due to factors including weakness in the British pound, dependence on food and energy imports and a tight labor market from post-Brexit regulations.

Hu Pill, the Bank of England’s chief economist, caused 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 do our part,” and that workers and companies needed to stop passing the price rise on to each other.

“If what you’re buying has gone up a lot compared to what you’re selling, your position will be worse,” Pill said.

“So somehow in the UK, someone needs to accept that they are worse off and stop trying to maintain their real spending power by bidding up prices, whether through higher wages or energy through customers. Passing the cost.”

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

Still, he continued, “I appreciate it’s a bit of a harsh message, but … paying more for what we’re buying from the rest of the world relative to what we’re selling to the world is one of our costs.” reduce the power to do.”

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