Britons ‘need to accept’ they’re poorer, says Bank of England economist

British households and businesses “need to accept” they are poorer and stop seeking pay increases and pushing prices higher, the Bank of England’s chief economist, Huw Pill, has said.

Pill said a game of “pass the parcel” is taking place in the economy – as households and companies try to pass on their higher costs.

Speaking on a podcast produced by Columbia law school, Pill said it’s natural for a household to seek higher wages in response to soaring energy bills, or for a restaurant to increase its prices.

However, he said the UK is a big importer of natural gas, and its price has gone up a lot compared with the exports, mainly services, which the UK sells to the rest of the world.

“If the cost of what you’re buying has gone up compared to what you’re selling, you’re going to be worse off,” he said.

“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 higher wages or passing the energy costs through on to customers.

“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.”

“Instead, [people] try and pass that cost on to one of our compatriots, 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 generating inflation, and that part of inflation can persist.”

Last year, BoE governor Andrew Bailey, was widely criticised after saying workers should not ask for big pay rises, to try to stop prices rising out of control.

Pill’s comments risk attracting fresh criticism that Threadneedle Street is out of touch over the cost of living crisis, at a time when public sector workers have been striking as they sought pay rises to match, or beat, inflation.

They come on a day in which Nestlé, PepsiCo and McDonald’s have all reported that higher prices boosted their sales this year, and as UK families face 17.3% grocery inflation in supermarkets.

Bailey was paid £495,000 in the year to 28 February 2022, while Pill was paid £88,000 for his first five months and 24 days, according the the central bank’s annual report, taking his annual salary to £180,000. According to the latest official data, median average household disposable income last year was £32,300.

The headline rate of inflation in the UK fell by less than expected in March, to 10.1% from 10.4% in February, as households came under pressure from food and drink prices soaring at their fastest annual rate since 1977.

The Bank is widely expected to increase interest rates for the 12th time in a row next month, by 0.25 percentage points to 4.5%, as it attempts to curb inflation.

During the podcast, Pill explained that “inflation has been higher than we expected for longer, for an undesirably long time”, and that central banks have lifted interest rates to fight rising prices.

However, he said a series of shocks had all pushed inflation in the same direction, meaning price pressures had not dissipated.

First, the Covid-19 pandemic disrupted supply in the economy, just as the US government was handing out stimulus cheques to citizens in the lockdown. Those cheques led to increased demand for consumer goods, allowing retailers to lift prices.

Just as the pandemic inflation shock was easing, Russia turned off gas supplies to Europe, driving up wholesale energy prices by over 1,000%.

“That had a massive contribution to inflation,” Pill says, and while gas prices have fallen recently from their Ukraine war highs, food price inflation is now accelerating.

In the UK, food and non-alcoholic drink inflation is the highest in 45 years, with prices rising by over 19% in the year to March.

Last month, the Unite union reported that large corporations have fuelled inflation with price increases that go beyond rising costs of raw materials and wages.

This trend of “greedflation” is causing growing concern in central banking circles, given companies have had little trouble in hiking their prices.

“Many companies have taken advantage of the return of inflation to inflate their prices excessively, at the risk of stimulating an inflationary spiral,” warned Charles-Henry Monchau, chief investment officer at Bank Syz, the boutique Swiss private bank.

“The idea is simple: when world prices rose because of supply and demand, companies raised their prices. But they didn’t just raise them to cover higher costs. They have fuelled inflation with price increases that go beyond the rise in raw material costs and wages, pushing their revenues to record levels,” Monchau said.

The weakness of the pound has also pushed up the cost of imports. Sterling fell to a record low last autumn after the mini-budget chaos, hitting $1.03, but has now recovered to about $1.24. Before the 2016 Brexit vote, the pound was worth almost $1.50.

Source: The Guardian