Workers asking for wage increases risk embedding inflation, says bank boss | Andrew Bailey

According to the governor of the Bank of England, who warned there was a risk of inflation becoming “embedded”, workers should not ask for wage increases to match inflation.

Andrew Bailey, who added that he doesn’t expect interest rates to stabilize at pre-financial crisis levels of about 5%, declined to be pulled over what an appropriate wage increase would be, a day after warning inflation could rise in October. 13% would reach . The Bank’s inflation target is 2%.

“If everyone tries to beat inflation – and that’s both in pricing and wage setting – it doesn’t come down, it gets worse,” he told BBC Radio 4’s Today program on Friday. “My main point is that as inflation gets embedded and sustained, it gets worse. And the effects are getting worse.”

The UK is embroiled in a summer of strikes by workers in sectors from rail and aviation to post and telecommunications, as unions try to push for hikes to help members keep wages in line with inflation, which is at its highest point in 40 years.

Bailey acknowledged that with the UK entering a recession and inflation rising, it is the poorest who are most affected by the cost of living crisis.

“In this world, it is the people with the least wealth who are most affected because they do not have the bargaining power,” he said. “That’s broadly something we should all be very, very aware of.

“There are a lot of people who have been hit very hard by this inflation – all inflation hurts low-income people – but this time mainly because it’s concentrated in energy and food. Those are the essence of life. There’s a role in society to think about the fact that there are people who don’t have the same ability to offset the impact of inflation, who are being hit very hard by this.”

On Thursday, the Bank of England made its largest rate hike in 27 years in a bid to curb rising inflation as gas prices push up UK energy bills this winter. The rise from 0.5% to 1.75% brings UK interest rates to a 13-year high and is the sixth rise in a row.

Bailey said the country had experienced a domestic shock in the past two years in the form of a contraction in the workforce, leading to widespread recruitment difficulties, as well as rising energy and food prices, partly caused by the war in Ukraine and the supply shortage. . supply chain problems due to the Covid pandemic.

“We’ve had a domestic shock, we’ve had a contraction in the workforce for the past two years. I travel a lot through the country; I talk a lot with companies. The first thing companies want to talk to me about is the issues they have with hiring people, and that’s still ongoing. They also tell us that they don’t find it difficult to raise prices at the moment. I don’t think it can stay that way.”

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Bailey wouldn’t give a figure on where he thought interest rates could return once inflation eases, but he said he expected it to be below the 4% to 5% level it had seen before the 2008 financial crisis.

“We don’t know in quantitative terms,” ​​he said. “I don’t think we’re going to go back to where we were before the financial crisis in steady state.”

Paul Johnson, the director of the economic think tank the Institute for Fiscal Studies, said the next prime minister would need to find billions to support households and key services like the NHS.

“Thirteen percent inflation is an extraordinary number and it will have an impact on public finances,” he said. “They will have to find many more billions to support households.

“This is a much larger increase in energy bills than was expected a few months ago when the support packages were announced. And of course more money will be needed for public services – health care, education and so on – because with inflation at 13%… we’re looking at potentially big cuts in real terms on some of the public services that are going through a really rough time right now.”

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