Huw Pill’s intervention was not the first from the Bank of England to advocate restraint from ordinary folk when asking for pay increases. Bank of England Governor Andrew Bailey stoked great and entirely justified controversy last year with a similar message.
Mr Pill told the Beyond Unprecedented podcast from Columbia Law School in the US: “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 [through] higher wages or passing the energy costs through on to customers etcetera.
“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. To try and pass that cost on to one of our compatriots and saying, ‘We’ll be all right, but they will have to take our share too’ ¬- that pass-the-parcel game that’s going on here, that game is one that is just generating inflation, and that part of inflation can persist.”
You would imagine that there would not be many households or businesses who would view the crippling inflationary squeeze, or their attempts to survive it, as a “game”. And some might consider that Mr Pill has some cheek, not just in terms of this reference but also given his wider remarks and his decision to choose to make them, especially in light of his relatively elevated remuneration.
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And the “take our share” remark is not only irksome in itself but evokes memories of former Conservative prime minister David Cameron’s “all in this together” claim.
It should be emphasised that Mr Pill’s viewpoint is far less offensive than Mr Cameron’s behaviour in making the “all in this together” remark and at the same time hammering the worst-off in society with savage austerity, including cuts to welfare benefits.
That said, the Bank of England chief economist’s perspective is clearly wide open to challenge.
Annual UK consumer prices index inflation was 10.1 per cent in March, more than five times the 2% target set for the Bank of England by the Treasury and the highest rate in Western Europe.
There is no doubt the UK has some very home-grown problems on the inflation front, most notably the impact of Brexit.
It is disappointing at times not to hear much more from the Bank of England about the effects of the Conservatives’ hard Brexit under former prime minister Boris Johnson in fuelling inflation, although this impact is something that was highlighted not so long ago by former governor Mark Carney.
Meanwhile, although it is far easier to say for sure that the hapless Conservative administration has played a major part in fuelling UK inflation, there is certainly room for debate over whether the Bank’s huge quantitative easing programme had a detrimental impact in driving up prices and about whether the Old Lady of Threadneedle Street was too slow to increase interest rates.
To listen to the Tories of course, you might think they had not had a hand in fuelling inflation at all.
However, they most certainly have, with Brexit driving inflation higher through various transmission mechanisms.
Take for example the additional upward effect on pay from the UK’s skills and labour shortage crisis, which has been fuelled by Brexit and specifically the loss of free movement of people between the UK and European Economic Area countries.
Then there is the sorry fact that sterling is much weaker than it was before the Brexit vote in June 2016. A weaker pound makes imports of everything from food to cars more expensive, fuelling inflation.
Research published last December by the Centre for Economic Performance (CEP) at The London School of Economics showed leaving the European Union added an average of £210 to household food bills over the two years to the end of 2021, costing UK consumers a total of more than £5.8 billion. The research confirmed the price of food products had over that period increased by 6% as a result of leaving the EU. For the avoidance of doubt, these are big numbers.
On June 23, 2016, just ahead of the EU membership referendum result becoming clear, the pound was trading above 1.30 euros. It was yesterday afternoon trading below 1.14 euros.
Against the greenback, sterling was on June 23, 2016, trading close to $1.50. It is now trading around $1.245.
The UK’s inflation crisis, Mr Pill must surely recognise, is putting incredible strain on the finances of households and businesses alike.
And it follows a protracted grim period.
The UK economy has not felt at all like one that is doing well since before the global financial crisis. In the years that followed the crisis, after the Tories took the helm, there was a protracted squeeze on pay in real terms.
At times, it is easy to form the impression that Mr Pill and other senior figures who urge pay restraint would do well to learn close up about the everyday struggles for millions of households when it comes to their finances. They also seem at times to be detached from the realities facing businesses.
The Bank of England does not have an easy job in trying to tame the UK’s sky-high inflation.
But the fears of second-round inflation effects from people being awarded pay rises in line with price increases – and it must be recognised that many are nowhere near keeping up with the rate of inflation partly because they lack bargaining power – look to be overdone.
Base-year effects should, thankfully, see the UK’s grim inflation rate ease as the year goes on, albeit it has been proving stickier than anyone would have liked.
Furthermore, the Bank of England’s sharp hike in base rates should also act to bring inflation under control.
UK base rates have been raised from 0.1 per cent in December 2021 to 4.25%, and it is difficult to escape the impression that many of the effects of this hike have yet to feed through.
The Bank should also bear in mind the impact of savage real-terms cuts in pay over the medium and longer term on the struggling UK economy, in terms of bearing down on aggregate demand. Taking large sums of money in real terms from people who are facing the greatest struggle to make ends meet – and have to spend all or most of what they have to live – subtracts directly from demand.
The blameless UK public was made to pick up the tab for a global financial crisis triggered by the poor judgement of major institutions, with the worst-off paying a disproportionate price.
Now Mr Pill and others are asking blameless people to take their “share” of the pain for the UK’s inflation crisis.
“Share” implies some kind of fault, or at least the concept of fairness. However, there is obviously no fault and even the quickest glance at surging poverty levels in the UK would surely confirm things are anything but fair under the Tories.
Furthermore, the last thing we need to hear from policymakers is any kind of criticism of people who merely want to maintain their living standards, which are often far from great at the moment, by seeking pay rises in line with the UK’s grisly inflation rate.
