Huw Pill, the Bank of England’s chief economist, has warned that UK citizens need to accept their diminished spending power to prevent prices from continuing to rise.
Speaking on the Beyond Unprecedented podcast from Columbia Law School, Pill expressed concern over the reluctance to accept the reality that people are worse off.
He noted that workers have responded to higher bills and rising costs by demanding wage increases, and businesses have raised their prices accordingly. UK inflation, which measures the rate at which prices rise, was 10.1% in the year to March. Although the rate dipped slightly from 10.4%, it does not signify that prices are falling, but rather that they are rising at a marginally slower pace.
The Bank of England’s long-standing target for inflation is 2%. One of the Bank’s primary responsibilities is to maintain the inflation rate near this target. In response to rising prices, the Bank has increased interest rates to make borrowing more expensive, theoretically encouraging people to reduce spending and cool down demand for goods, which should slow down price increases.
Households are grappling with soaring energy bills and food costs, prompting many workers to ask for pay raises to alleviate budget pressures. While job vacancies have been falling, they remain at historically high levels, empowering people to request wage increases. However, pay increases have not kept pace with inflation, leaving people worse off.
Pill argued that demands for higher wages and businesses raising prices contribute to inflation, pushing prices even higher across the economy. He urged UK citizens to accept their reduced spending power and stop trying to maintain it by driving up prices through higher wages or passing energy costs onto customers.
He explained that this “pass-the-parcel game” generates inflation, which can persist if not addressed.
Pill is not the first Bank of England official to caution that wage increases may contribute to inflation.