Brits ‘need to accept’ that they are poorer, says Bank of England economist

British households and businesses “need to accept” that they are poorer and stop seeking pay rises and raising prices, Bank of England chief economist Huw Pill said.

Pill said a game of “passing the pack” is taking place in the economy, as households and businesses 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 rising energy bills, or for a restaurant to raise its prices.

However, he said the UK is a big importer of natural gas, and its price has risen a lot compared to exports, mainly of services, that 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 purchasing power by raising prices, whether it’s higher wages or passing energy costs on to customers.

“And what we are dealing with now is the reluctance to accept that, yes, we are all worse off and we all have to do our part.”

“Instead, [people] try to pass that cost on to one of our compatriots, saying ‘we’ll be fine, but they’ll have to take our share too’.

“That game of passing the package that is going on here… that game is creating inflation, and that part of the inflation may persist.”

Last year, BoE Governor Andrew Bailey came under fire after saying that workers should not ask for big wage increases to try to prevent prices from spiraling out of control.

Pill’s comments risk drawing fresh criticism that Threadneedle Street is out of touch with the cost of living crisis, at a time when public sector workers have been on strike seeking pay rises to match or exceed inflation.

They come on a day when Nestle, PepsiCo and McDonald’s reported higher prices boosted their sales this year, and UK families face 17.3% inflation in supermarkets.

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

A graph showing UK inflation

The Bank is widely expected to raise interest rates for the 12th straight time next month, by 0.25 percentage points to 4.5%, as it tries to rein in 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 raised interest rates to combat rising prices.

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

skip previous newsletter promotion

First, the Covid-19 pandemic disrupted supplies in the economy, just as the US government was handing out stimulus checks to citizens in lockdown. Those controls led to an increase in demand for consumer goods, allowing retailers to raise prices.

Just as the inflationary shock of the pandemic was easing, Russia cut off gas supplies to Europe, driving up wholesale energy prices by more than 1,000%.

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

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

A graph showing food price inflation in the UK

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

This trend towards ‘inflationary greed’ is causing growing concern in central banking circles, as companies have had little trouble raising their prices.

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

“The idea is simple: when world prices rose due to supply and demand, companies raised their prices. But they didn’t just increase them to cover higher costs. They have fueled inflation with price increases that go beyond rising costs of raw materials and wages, driving 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 fall after the mini-budget chaos, hitting $1.03, but has now recovered to around $1.24. Before the 2016 Brexit vote, the pound was worth almost $1.50.

Leave a Comment