Britain’s companies and households need to accept that high energy prices and inflation will make them “all worse off”, the Bank of England’s chief economist said on Tuesday, in an attempt to head off a wage-price spiral.
Huw Pill told a Columbia University podcast that high inflation would persist if companies remained unwilling to take a hit on their profit margins and employees resisted declines to their purchasing power.
“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 [or] wages or passing the energy costs on to customers,” Pill said.
“You don’t need to be much of an economist to realise that if what you’re buying has gone up relative to what you’re selling, you’re going to be worse off,” he added, referring to the impact of energy price rises on the UK as a big net importer of natural gas.
Pill added that interest rate rises in the US and UK over the past year were designed to cool spending power and the ability of companies and people to pass on the pain of inflation to others. The BoE increased rates to their current level of 4.25 per cent in March.
But the chief economist said inflation would stay high if companies and households refused to accept that they were poorer than before and instead played “pass the parcel” with price rises.
“What we’re facing now is that reluctance to accept that, yes, we’re all worse off,” he said.
In a similar message, Ben Broadbent, BoE deputy governor, said on Tuesday there was “no getting round the impact on real incomes of . . . jumps in import prices”, which he said had “led to second-round effects on domestic wages and prices”.
Pill did not say whether he thought the BoE’s interest rate rises to date were sufficient to head off such inflationary spirals or indicate whether he thought further interest rate rises were needed.
The BoE chief economist has previously said the onus on monetary policy is to ensure that it will “see the job through” to bringing down inflation to the bank’s 2 per cent target.