Workers should refrain from asking for inflation-matching pay rises, according to the governor of the Bank of England, who warned there was a risk of inflation becoming “embedded”.
Andrew Bailey, who added that he does not expect interest rates to settle at pre-financial crisis levels of about 5%, refused to be drawn on what an appropriate pay rise would be, a day after he warned inflation would hit 13% in October. The Bank’s inflation target is 2%.
“If everybody tries to beat inflation – and that is in both price-setting and wage-setting – it doesn’t come down, it gets worse,” he said, speaking to BBC Radio 4’s Today programme on Friday. “My key point is, if inflation becomes embedded and persistent, it gets worse. And the effects get worse.”
The UK is embroiled in a summer of strikes by workers in industries from rail and aviation to post and telecommunications as unions attempt to secure increases to allow members to keep wages in line with inflation levels running at a 40-year high.
Bailey acknowledged that as the UK heads into recession and inflation soars, it is the poorest who are being affected most by the cost of living crisis.
“In this world it is the people who are least well-off who are worst affected because they don’t have the bargaining power,” he said. “That is something broadly that we all have to be very, very conscious of.
“There are a lot of people out there who are very badly affected by this inflation – all inflation affects people on low incomes badly – but this time particularly because it is concentrated in energy and food. Those are the essentials of life. There is a role in society to reflect on the fact there are people who do not have the same ability to offset the impact of inflation that are going to be very badly affected by this.”
On Thursday the Bank of England made its biggest increase in interest rates in 27 years in an attempt to curb soaring inflation as gas prices drive up UK energy bills this winter. The 0.5% rise to 1.75% takes the UK interest rate to a 13-year high and is the sixth rise in a row.
Bailey said the country had faced a domestic shock in the form of a shrinkage in the labour force over the last two years, causing widespread hiring problems, as well as soaring energy and food prices caused in part by the war in Ukraine as well as supply chain problems because of the Covid pandemic.
“We have had a domestic shock, we have had a shrinkage in the labour force over the last two years or so. I go around the country a lot; I talk to businesses a lot. The first thing businesses want to talk to me about is the problems they are having hiring people, and that is still going on. They are also saying to us actually they are not finding it difficult to raise prices at the moment. I think that can’t go on.”