The Bank of England’s (BoE) governor is worried that inflation is building up because UK firms are raising salaries for high earners amid a hiring crunch and hiking prices.
Andrew Bailey told BBC Radio 4: “If everyone tries to beat it [inflation], it doesn’t come down, it gets worse. That’s the problem.
“I put this in terms of high pay rises and high price increases, because in that world it’s the people who are least well off who are worst affected because they don’t have the bargaining power, and I think that is something that, you know, I would say broadly we all have to be very, very conscious of.”
In May, Bailey said workers, particular high earners, should “think and reflect” before asking for high wage increases — a remark which drew criticism at the time.
Andrew Bailey told The Today Programme that policy makers must act to prevent a wage-price spiral from fuelling inflation, which is growing at its quickest pace in four decades and forecast to leap above 13% later this year.
“The real risk we’re responding to is that the inflation becomes embedded and it doesn’t come down in the way that we expect,” Bailey told The Today Programme.
“We’ve had a shrinkage in the labour force. I talk to businesses a lot. The first thing they want to talk to me about is that businesses have trouble hiring people, and that is still going on. They’re also saying to us actually they’re not finding it difficult to raise prices at the moment. That can’t go on.”
It comes a day after the Bank's Monetary Policy Committee raised interest rates by 50 basis points to 1.75% — the biggest increase in 27 years.
The unions were not happy with yet another call to freeze salary increases, with TUC head of economics Kate Bell saying workers are already being squeezed to the limit.
“It’s time for companies to rein in their profits — not for hard pressed workers to cut back even further, she said.
“After the longest and harshest wage squeeze in 200 years, working people in every part of the country are suffering a huge fall in living standards as prices soar.
“With incomes set to fall even further and the economy teetering on the brink of recession, it’s now more than ever that workers need a pay rise.
Watch: What is a recession and how do we spot one?
“Without wage increases, working people will simply stop spending on anything non-essential — and that will hurt our high streets, damage business and make a recession very likely, putting jobs at risk up and down the country.
“Making sure people can put food on the table for their family is not going to push up inflation.
Helen Goodman, professor in practice at Durham University’s School of Government and International Affairs, said the governor should look at bankers pay.
This interview by @justinwebb of @andrewbailey on #r4today is so annoying - why not ask Bailey about pay at the top and the high private pay rises compared to the public sector especially among bankers? @AngelaEagle
— Helen Goodman (@HelenGoodmanBA) August 5, 2022
The Bank of England governor defended his approach to tightening monetary policy, saying acting too soon would have derailed the UK’s post-pandemic recovery.
Bailey pointed to warnings of a sharp rise in unemployment as the furlough scheme ended.
He said: “That would have been a very different scenario if we had raised interest rates.” Asked if such a move would have harmed the economy, he responded: “Yes.”
Bailey denied that the BoE acted too late to tackle the UK’s inflationary threat as no-one knew a year, or two years ago, that there would be a war in Ukraine.
“If you go back two years, which is, given the monetary transmission mechanisms, where we’d have to go back to, given the situation we were facing at that point in the context of COVID, in the context of the labour market, the idea that at that point we would have tightened monetary policy, you know I don’t remember there were many people saying that,” he said.
His comments come after attorney general Suella Braverman said interest rates “should have been raised a long time ago and the Bank of England has been too slow in this regard”.
Bailey said he would see out his full term in the job whatever happens under the UK’s next prime minister.
Asked about a review of the BoE's remit planned by Liz Truss, the leading candidate to replace Boris Johnson next month, Bailey said he was open to discussing with the government how the bank should operate.
"I actually don't think from what I see that I think there is a large desire in this country to question central bank independence, but I'm very happy to discuss with the new government you know, the details and the nature of the regime that's in place," he told The Today Programme.
The UK is forecast to fall into recession this year, with the longest downturn since 2008 predicted.