Bank of England sends a shocking message: we must accept that we are poorer in this complex moment of high inflation. Higher wages and higher prices for goods and services are detrimental.
The Bank of England has an overly concise vision of the current economic situation: we have to accept being worse off and being poorer.
Faced with inflation still in the double digits in the nation, Huw Pill, chief economist at the Bank of England, had no doubts about what to advise workers and businesses: “And what we’re facing now is that reluctance to accept that, yes, we’re all worse off, and we all have to take our share.”.
The point of reflection is all too clear: companies and workers are trying to pass the impact of inflation on to each other and this risks keeping prices high for longer.
The statements are already causing embarrassment and criticism in the UK. The impression is that the economic-financial-political moment is so complex, between inflation, recession, war and energy uncertainty that finding credible solutions is becoming difficult even for experts and economists.
Is accepting being poorer really the only way left? What is happening in the English nation that concerns all of Europe.
Should the UK accept that it is poorer?
Huw Pill’s words in the Millstein Center podcast “Beyond Unprecedented” are reopening a debate that has never closed in the UK as well as throughout Europe: what to do with high inflation and how much impact can the wage-price spiral have?
The reasoning started here: There’s been a “series of inflationary shocks” fueling inflation over the past 18 months, from the pandemic supply disruption and government household support programs that have increased demand, the Russian invasion of Ukraine and the consequent increase in energy prices in Europe. This was followed by adverse weather conditions and an outbreak of bird flu which sent food prices soaring.
The inflationary storm has thus been served. With the consequence that workers ask for higher wages and companies increase the prices of goods and services.
“Of course, this process is ultimately self-defeating”, Pill said. He added that the UK, which is a net importer of natural gas, has been facing a situation where the goods it buys from the rest of the world have increased a lot compared to what it sells to the rest of the world, mainly services. The UK imports nearly half of its food, for example.
Hence, the shocking conclusion: “So somehow in the UK, someone needs to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether higher wages or passing the energy costs through onto customers.”.
In February 2022, the Bank of England Governor Andrew Bailey came under criticism when he said wage bargaining could create domestic inflationary pressures and urged workers and employers to show “moderation” in salary discussions.
Bailey’s comments were criticized by unions for focusing on how wages, not corporate profits, could fuel inflation. In reality, this reasoning is common to central banks and Lagarde has often reiterated it.
Is the wage-price spiral really a threat?
The concept of wage-price spiral, when rising wages create a cycle of inflationary pressures increasing costs to firms and demand, is debated in economics.
Several policymakers, including US Treasury Secretary Janet Yellen and European Central Bank officials, said they saw no evidence of it in the US or the eurozone.
Economists, including IMF chief economist Pierre-Olivier Gourinchas, said wages can safely rise further, as they have not grown significantly relative to inflation and the corporate world has maintained comfortable margins.
However, some argue that the UK is particularly at risk of a wage-price spiral that can lead to stagflation - low or no economic growth and high inflation - due to its import-heavy economy, sterling weakness Britain, a tight job market that has been constrained by Brexit and years of stagnant wage growth.
UK inflation was expected to fall into single digits in March but stood at 10.1%, with core inflation - which excludes food and energy and is closely monitored by the Bank of England - to 5.7%.
Waiting to understand how Bank of England will pronounce on rates, and before it Fed and ECB grappling with similar inflationary problems even if not of the same magnitude, is passively accepting to be poorer the solution? Or, rather, does it sound like a hyper-liberal refrain?
Original article published on Money.it Italy 2023-04-26 15:29:00. Original title: “Accettate di essere più poveri”: la strategia shock di Bank of England
