BoE governor warns against high pay rises and price increases
The Bank of England governor has urged workers and businesses to resist pushing for high wage and price increases to match inflation.
He tells the Today Programme this would fuel inflation and hurt the least well off in society, in a signal to both companies and unions.
Q: What’s an inflationary pay rise in the current climate?
Andrew Bailey says there isn’t a specific number, but if everyone tries to beat inflation in both price setting and wage setting then it won’t fall.
If everyone tries to beat it, it doesn’t come down, it gets worse, that’s the problem.
The second problem, is that those who are worst hit by inflation are the poorest, who don’t have the bargaining power to protect themselves.
Bailey says:
“I put this in terms of high pay rises and high price increases, because in that world it’s the people who are least well off who are worst affected because they don’t have the bargaining power.
I think that is something that, you know, I would say broadly we all have to be very, very conscious of.”
Q: So that’s your message is that those who do have the muscle….
Bailey explains that the current inflation shock is particularly bad for people on low-incomes as it is concentrated in food and energy — essential staples for us all.
I think there is a role in society to reflect on the fact that there are people who do not have the same ability to offset the effects of inflation, and they are going to be very badly affected by this.
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Millions cut back on energy, food and essentials
Around 24 million people in Great Britain have been cutting energy use in their home, while 16 million cut back on food and essentials, the Office for National Statistics has warned.
The ONS’s latest cost of living survey has found that nine in 10 adults in Great Britain said their cost of living has increased, as rising inflation hammered household incomes.
The most common causes were:
- an increase in the price of their food shop (94%)
- an increase in gas or electricity bills (82%)
- an increase in the price of fuel (77%)
Faced with these price rises, millions of families are cutting spending where they can, running down their savings, or borrowing more on credit.
More than a third of those whose cost of living had gone up cut back spending on food and essentials (equal to around 16 million people).
Almost a quarter (23%, around 11 million people) used savings to cover costs, and 13% (around 6 million people) said they were using more credit than usual.
Grim and unsurprising findings in latest @ONS household finance update. Proportions reporting increases in cost of living, reduced capacity to save and reduced capacity to meet emergency costs remain elevated. But upward drift in proportion using credit to cope is a big concern pic.twitter.com/if4LdM3Vif
— Matt Whittaker (@MattWhittakerPB) August 5, 2022
The survey also found that people are:
- spending less on non-essentials (57%, around 26 million people)
- using less gas and electricity in their home (51%, around 24 million people)
- cutting back on non-essential journeys in their vehicle (42%, around 19 million people)
In terms of the drivers of cost of living increases, respondents are feeling it across a number of areas. 84% say the cost of their food shop has increased, 73% point to rising domestic fuel costs. And 69% highlight rising transport fuel costs pic.twitter.com/s8460feD25
— Matt Whittaker (@MattWhittakerPB) August 5, 2022
Breaking away from the UK economic crisis briefly… Britain’s financial watchdog has fined City veteran Sir Chris Gent £80,000 for disclosing inside information.
The Financial Conduct Authority (FCA) said Gent, the former chair of medical products maker ConvaTec Group, had told two of ConvaTec’s major shareholders about two announcements, before the information had been announced properly to the market
They related to an expected revision of ConvaTec’s financial guidance and the CEO’s plans for retirement.
We consider Sir Christopher acted negligently in disclosing inside information to individuals at two of ConvaTec’s major shareholders before it was properly announced to the market https://t.co/SWJKCfgeWb
— Financial Conduct Authority (@TheFCA) August 5, 2022
Gent, a former chief executive of mobile network giant Vodafone, had acted negligently in disclosing the information, says the FCA.
But there’s no evidence he traded on the information or that he intended to make personal gain, or avoid loss, from making the disclosures.
wow – The FCA has fined Sir Christopher Gent, former non-executive chairman of ConvaTec Group Plc, £80,000 for unlawfully disclosing inside information. https://t.co/DwRrVQdm22
— Tony Tassell (@TonyTassell) August 5, 2022
The Bank of England’s chief economist says the Bank is trying to keep its options open over future interest rate moves.
Huw Pill has told Bloomberg TV that the BoE wants to “ensure there’s an element of flexibility” over borrowing cost changes, so people shouldn’t assume rates will rise by another 50 basis points at its next meeting.
Given the uncertainties we face, I think we need flexibility either to go further, or to stay where we are, and the pace at which we go further to be varied according to circumstances”
But will rising interest rates hit house prices, as it pushes up mortgage costs?
Pill says the Bank expects the housing market to cool, but doesn’t foresee a ‘dramatic downturn’.
World food prices fall, helped by Ukraine wheat deal
We have some good news in the global battle against soaring inflation.
World food prices dropped significantly in July, according to the United Nations food agency’s world price index, further below their record highs after the Ukraine invasion began.
The UN’s Food and Agricultural Organization says the Black Sea export deal agreed between Russia and Ukraine last month was a key factor.
Its Cereal Price Index dropped by 11.5% last month, with wheat leading the price falls.
World wheat prices dropped by as much as 14.5%, FAO said, partly in reaction to the Russia-Ukraine deal on grain exports from key Black Sea ports, and also because of seasonal availability from ongoing harvests in the northern hemisphere.
Prices of vegetable oil, sugar and meat also dropped, pulling the FAO’s index of the most globally traded food commodities down to 140.9 points last month, from 154.3 in June.
But, the FAO warned that the bleak global economic outlook could threaten food security.
“The decline in food commodity prices from very high levels is welcome, especially when seen from a food access viewpoint,” said Maximo Torero, FAO Chief Economist.
“However, many uncertainties remain, including high fertilizer prices that can impact future production prospects and farmers’ livelihoods, a bleak global economic outlook, and currency movements, all of which pose serious strains for global food security.”
Here’s Helen Goodman, professor in practice at Durham University’s School of Government and International Affairs, on this morning’s interviews:
The Bank has come under fresh political fire this morning, from business minister Kwasi Kwarteng.
Kwarteng, who is backing Liz Truss, argues that the Bank was too slow to respond to rising inflation in 2021.
Kwarteng told Sky News:
“There is an argument – and I think it’s a strong one – to say that inflation was an issue that was identified at the beginning of last year.
“If your target is 2% and you’re predicting 13%, something’s gone wrong. And you’ve got to look at how the bank is organised and what the what the targets are,”
Inflation was just 0.4% in February 2021, when the UK was still in a Covid-19 lockdown. But it then started climbing, and by May 2021 was above the Bank’s 2% target.
However, the BoE resisted raising interest rates until its final meeting of 2021, worried that unemployment would jump when the furlough scheme ended that autumn.
Asked whether the BoE would keep its independence in a Truss-led government, Kwarteng said:
“It’s absolutely going to keep its independence.”
And Kwarteng also argued that cutting the tax burden, as Truss plans, will help:
“I’ve never understood why if we’re going to help people, how are we going to help people by putting up their taxes? Especially when their daily shop, their costs, are going up.
“What’s very clear to me from what the Bank of England said yesterday is that more of the same, just simply carrying on with our economic policy at the moment, is not going to cut it, it’s not going to help us get out of this difficulty.”
Andrew Bailey also says he doesn’t know what ‘normal’ interest rates will be in future, but they’re not going back to their levels before the 2008 financial crisis.
And he argues the Bank’s plan to start selling government bonds purchased under its £895bn quantitative easing programme will not have a ‘big impact’ on the cost of government borrowing.
“We don’t think that the rolling back of QE and the sale of assets is going to have a big impact on market interest rates”
BoE governor warns against high pay rises and price increases
The Bank of England governor has urged workers and businesses to resist pushing for high wage and price increases to match inflation.
He tells the Today Programme this would fuel inflation and hurt the least well off in society, in a signal to both companies and unions.
Q: What’s an inflationary pay rise in the current climate?
Andrew Bailey says there isn’t a specific number, but if everyone tries to beat inflation in both price setting and wage setting then it won’t fall.
If everyone tries to beat it, it doesn’t come down, it gets worse, that’s the problem.
The second problem, is that those who are worst hit by inflation are the poorest, who don’t have the bargaining power to protect themselves.
Bailey says:
“I put this in terms of high pay rises and high price increases, because in that world it’s the people who are least well off who are worst affected because they don’t have the bargaining power.
I think that is something that, you know, I would say broadly we all have to be very, very conscious of.”
Q: So that’s your message is that those who do have the muscle….
Bailey explains that the current inflation shock is particularly bad for people on low-incomes as it is concentrated in food and energy — essential staples for us all.
I think there is a role in society to reflect on the fact that there are people who do not have the same ability to offset the effects of inflation, and they are going to be very badly affected by this.
Bailey: Firms aren’t struggling to raise prices
Q: What’s the point in raising interest rates, if the inflationary shock is coming from global energy and food prices?
Bailey says the real risk is that inflation becomes embedded, following a domestic shock and a fall in the labour market over the last two years.
Firms are telling him that they’re struggling to find workers, and not finding it hard to raise prices.
The economy is ‘still robust’ in the eyes of businesses, he says, and if inflation becomes embedded it becomes worse.
Bailey says:
The first thing they want to talk to me about is that businesses have trouble hiring people, and that is still going on. They’re also saying to us actually they’re not finding it difficult to raise prices at the moment.
That can’t go on.
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