Workers should refrain from asking for wage increases in line with inflation, according to the Governor of the Bank of England, who warned that there was a risk that inflation would become “embedded”.
Andrew Bailey, who added that he did not expect interest rates to settle at pre-financial crisis levels of around 5%, refused to be fired at what a appropriate pay rise, a day after warning that inflation would hit 13% in October. . The Bank’s inflation target is 2%.
“If everyone is trying to beat inflation – and that’s in both price setting and wage setting – it doesn’t go down, it gets worse,” he said, addressing on BBC Radio 4’s Today program on Friday. “My key point is that if inflation becomes embedded and persistent, it gets worse. And the effects get worse.
The UK is in the throes of a summer of strikes by workers from the rail and aviation industries to the post and telecoms as unions try to win raises to allow members to keep wages in line with inflation levels at their highest for 40 years.
Bailey acknowledged that as the UK heads into recession and inflation soars, it is the poorest who are most affected by the cost of living crisis.
“In this world, it’s the less well-off people who are the most affected because they don’t have the bargaining power,” he said. “It’s something that we all have to be very, very aware of.
“There are a lot of people who are being hit very hard by this inflation – any inflation hits low-income people hard – but this time around mostly because it’s concentrated in energy and food. These are the essentials of life. There is a role in society to reflect on the fact that there are people who don’t have the same ability to offset the impact of inflation who are going to be hit very hard by this.
The Bank of England made its biggest interest rate hike in 27 years on Thursday in a bid to rein in soaring inflation as petrol prices drive up energy bills in the Kingdom United this winter. The rise from 0.5% to 1.75% takes the UK interest rate to its highest level in 13 years and is the sixth consecutive rise.
Bailey said the country had faced a domestic shock in the form of a shrinking labor force over the past two years, causing widespread hiring problems, as well as soaring energy prices. and foodstuffs caused in part by the war in Ukraine as well as supply. chain problems due to the Covid pandemic.
“We had an internal shock, we had a decrease in the labor force for the last two years or so. I travel the country a lot; I talk to companies a lot. The first thing companies want to talk to me about is the problems they have hiring people, and it continues. They also tell us that they have no difficulty raising prices at the moment. I don’t think this can go on any longer.
Bailey didn’t give a figure he thought rates could come back to once inflation abates, but said he expected it to be below the 4% to 5% levels seen before. the financial crisis of 2008.
“We don’t know in quantitative terms,” he said. “I don’t think at steady state we’re going back to where we were before the financial crisis.”
Paul Johnson, director of the economic think tank Institute for Fiscal Studies, said the next prime minister would have to find billions to support households and key services such as the NHS.
“Thirteen percent inflation is an extraordinary figure 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 plans were announced. And of course, more money is going to be needed for public services – health services, education, etc. – because with inflation at 13%…we are looking at potentially big cuts in real terms to some of the public services that are really struggling right now.