The Governor of the Bank of England admits that the British economy is suffering from a wage-price spiral

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Andrew Bailey has acknowledged for the first time that the Bank of England is dealing with a downward spiral in UK wage rates, vowing to raise interest rates “as necessary” to bring inflation back to the bank’s 2 per cent target.

Speaking to the annual conference of the British Chambers of Commerce in London, the BoE governor said the UK was seeing “second round” effects of inflation, highlighting the pervasiveness of rapid price increases from energy and food to generalized wages and price fixing by firms.

“Some of the strength in core inflation reflects the spillover effects of higher energy prices,” Bailey said.

But it also reflects second-round effects where the external shocks that we’ve seen interact with the state of the domestic economy. And with headline inflation lower, these second-round effects are unlikely to disappear as quickly as they appeared.”

Throughout 2022 and into this year, the Bank of England has repeatedly said it is trying to stem the risks of rising energy and food costs affecting domestic wages and prices. She has now admitted that she failed in that task.

One good news in the economy, the governor said, is that wage growth has eased slightly and “near-term indications are that wage growth could ease further later this year.”

But the Monetary Policy Committee of the Bank of England was looking for more progress before it was convinced that it had restored price stability to the UK economy.

Bailey said, “The prospects for inflation are more uncertain and depend on the extent to which wages and prices continue to be fixed,” adding that “the committee will continue to closely monitor indicators of continued inflationary pressures.”

“I can assure you that the MPC will adjust the bank rate as necessary to return inflation to a sustainable target over the medium term, in line with its mandate,” Bailey said.

Chancellor Jeremy Hunt echoed the words of the governor, who said at the same conference there was “nothing automatic” in lowering inflation.

After it emerged last week that the BoE believed there was closer to a 50:50 chance it would miss Rishi Sunak’s target of halving inflation this year, Hunt refused to criticize the BoE in its fight against inflation.

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“The BoE has its role to play with monetary policy and interest rates, and we support them 150 per cent in that,” he said.

Hunt has also waded into the Conservative Party’s dispute over immigration, calling for the UK to maintain a pragmatic stance on the issue. “If you look at what’s happened since the Brexit vote, since we left the single market, the government has been very pragmatic when it comes to immigration requirements,” he said.

At the same conference, which Bailey spoke about after he withdrew from the CBI equivalent prior to its cancellation, BCC Director General Shevaun Haviland sought to position the body as an advocate for “every business”.

It did not name the CBI, the business lobby group that suspended operations after a misconduct scandal, but said the business needed a “new relationship with the government”. Haviland added: “With the general election less than 18 months away, we are at a pivotal moment for the voice of British business.”

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