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Brits need to accept they are now poorer, Bank of England chief economist says - CNBC

MAY 06, 2023


  • Huw Pill, the U.K. central bank’s chief economist, told a podcast workers and companies were in a game of “pass the parcel” over the impact of inflation.
  • Pill said inflation had been generated by shocks including the pandemic, the war in Ukraine and crop shortages.
  • But he added that in the U.K., people needed to accept that the costs of the goods it imports had risen more rapidly than the value of what it exports.

LONDON — Companies and workers are trying to pass the impact of inflation onto each other — and that risks persistent inflation, according to Huw Pill, the Bank of England’s chief economist.

“What we’re facing now is that reluctance to accept that yes we’re all worse off, we all have to take our share,” Pill said on an episode of Columbia Law School and the Millstein Center’s “Beyond Unprecedented” podcast, released on Tuesday.

“To try and pass that cost on to one of our compatriots and say, we’ll be alright but they will have to take our share — that pass the parcel game ... is one that is generating inflation,” he said.

Pill was discussing the “series of inflationary shocks” that had fueled inflation over the last 18 months, from pandemic supply disruption and government household support programs boosting demand, to the Russian invasion of Ukraine and resulting spike in European energy prices. That has been followed by adverse weather and an outbreak of avian flu driving up food prices.

But Pill said that was not the whole story, and that it was “natural” that the behavior of price-setters and wage-setters in economies including the U.K. and U.S. would change when living costs such as energy bills rise, with workers asking for higher salaries and businesses raising prices.

“Of course, that process is ultimately self-defeating,” said Pill.

He added that the U.K., which is a net importer of natural gas, faced a situation where the goods it buys from the rest of the world had gone up a lot relative to what it is selling to the rest of the world, primarily services. The U.K. imports nearly half its food.

“So somehow in the U.K., someone needs to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether higher wages or passing energy costs through on to customers, etcetera.”

Pill’s comments have been widely published across U.K. media. In February 2022, Bank of England Governor Andrew Bailey came under scrutiny when he said wage bargaining could create domestic inflationary pressures and urged workers and employers to show “restraint” in pay discussions. Bailey’s comments were criticized by unions for focusing on how wages, not corporate profits, can fuel inflation.

The concept of a wage-price spiral, when rising wages create a loop of inflationary pressures by increasing costs for businesses and boosting demand, is debated within economics. Several policymakers — including U.S. Treasury Secretary Janet Yellen and European Central Bank officials — have said they do not see evidence of it in the U.S. or euro zone.

Economists, including IMF Chief Economist Pierre-Olivier Gourinchas, have said wages can rise further without risking growth since they have not risen significantly when adjusted for inflation and the corporate world has maintained comfortable margins.

But some argue the U.K. is particularly at risk of a wage-price spiral contributing to “stagflation” — low or no economic growth and high inflation — due to its import-heavy economy, weakness in the British pound, a tight labor market which has been constrained by Brexit, and years of stagnant wage growth.

U.K. inflation was expected to drop into the single digits in March, but came in at 10.1%, with core inflation — which excludes food and energy and is closely watched by the Bank of England — at 5.7%.


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