UK Is Facing a Wages-Price Spiral: BoE

After more than a year of warnings, Bank of England Governor Andrew Bailey says the UK is now experiencing a wage-price spiral despite 12 consecutive central bank interest rate hikes.

“Some of the strength in core inflation [in the UK] reflects the indirect effects of higher energy prices,” Bailey said in a Wednesday speech. “But it also reflects second-round effects as the external shocks we have seen interact with the state of the domestic economy,” CNBC reported Thursday.

“As headline inflation falls, these second-round effects are unlikely to go away as quickly as they appeared.” These areas of persistence, he continued, include domestic wage growth and price setting.

This situation risks a wage-price spiral — a theory that says that workers bargain for wage increase as inflation rises, fueling higher demand and pushing companies to raise prices to compensate for steeper expenses. This in turn leaves workers requiring higher wages to afford goods and services — perpetuating so-called “second-round effects.”

The UK inflation rate surprised economists by holding above 10% in March. Core inflation, excluding food, energy, alcohol and tobacco, was steady on the previous month at 5.7%.

Bailey said that the loosening of the labor market, as vacancies begin to fall, is happening more slowly than the central bank previously anticipated.

He noted that nominal wage growth — not adjusted for inflation — and services price inflation had occurred in line with the bank’s forecasts. The Bank of England sees signs of a slowdown in wage growth, but observes that services inflation remains elevated, Bailey added.

The bank’s monetary policy committee “continues to judge that the risks to inflation are skewed significantly to the upside,” he said, and would keep adjusting its main bank rate “as necessary” to reach its 2% inflation target.