Inflation Control Requires Limitting Pay Rises and Profits
Sarah Breeden, one of the central bank’s deputy governors, highlighted the considerable distance remaining before inflation retreats to the government’s 2% target, a goal the Bank aims to achieve on a sustainable basis. She emphasized the challenges in reaching this target and the importance of sustained efforts.
In a discourse delivered almost a week after maintaining interest rates at their highest level since the 2008 financial crisis, Sarah Breeden highlighted the persistent challenges in controlling inflation, particularly in the economy service sector, which remains considerably high compared to the Bank’s target.
“Some combination of moderation in pay pressures and firms’ margins will be required for services inflation to return to more normal rates,” she stated.
The Bank emphasized the importance of waiting for further evidence of inflation dropping back to its target and remaining at those levels before considering its first interest rate cut since the beginning of the COVID-19 pandemic. This cautious approach reflects the Bank’s commitment to ensuring stability in inflation levels.
In December, inflation fell to 4%, marking a significant decrease from over 10% a year earlier, as indicated by the latest official figures. This decline, driven by factors such as a decrease in global energy prices, has led most economists to anticipate that inflation will dip below 2% in the coming months.
Inflation Concerns Loom as Bank Expresses Worry Over Rising Domestic Pressures
Financial markets predict that the combination of falling inflation and sluggish economic growth may prompt the Bank to consider cutting interest rates by up to one percentage point this year, from the current rate of 5.25%.
The Bank’s policymakers express concerns regarding persistent inflationary pressures stemming from the domestic economy. They fear that such pressures could push inflation closer to 3% by the end of the year, citing risks associated with rising service sector prices and robust wage increases. This heightened inflation could have significant economic implications, requiring policymakers to consider appropriate measures to address it.
Speaking at an event hosted by the UK Women in Economics Network, Breeden highlighted that indicators of annual pay growth have remained in the 6-7% range, notably higher than in recent years.
She remarked, ‘[This is] still elevated and, given the current weakness in productivity growth, several percentage points higher than what is consistent with the inflation target, were they to persist,’ underscoring the potential impact on inflation and productivity.”
In the three months leading up to November, annual growth in average workers’ earnings, excluding bonuses, decreased to 6.6%, down from a peak of nearly 8% in July – the highest level since comparable records began in 2001. This decline reflects changing economic conditions and has implications for inflation and economic growth.”
However, these figures coincide with a noticeable slowdown in the UK labor market, characterized by a consistent decline in job vacancies and increasing levels of unemployment. This slowdown has implications for inflation and economic policy, highlighting the need for targeted interventions to address labor market challenges.
