Brits must face new economic reality – BoE exec

The Bank of England’s chief economist, Huw Pill, has warned that companies and workers trying to pass the impact of inflation onto each other risk causing persistent inflation. Pill stated that the reluctance to accept the fact that everyone is worse off could cause a “pass the parcel game” where companies and workers try to avoid taking their share of the impact. This behavior generates inflation and contributes to the series of inflationary shocks that have occurred over the past 18 months.

Pill explained that rising living costs, such as energy bills, would change the behavior of price-setters and wage-setters in economies such as the UK and US, resulting in workers asking for higher salaries and businesses raising prices. However, he emphasized that this process is ultimately self-defeating. Pill stated that someone needs to accept that they are worse off and stop trying to maintain their real spending power by bidding up prices, such as through higher wages or passing energy costs on to customers.

The UK, which is a net importer of natural gas, is in a situation where the goods it buys from the rest of the world have gone up relative to what it is selling to the rest of the world, primarily services. The UK imports almost half of its food, which means that if what the UK buys has gone up a lot relative to what it is selling, it will be worse off. Pill suggested that the UK needs to acknowledge this and stop trying to maintain its real spending power.

Pill’s comments have been widely published in UK media. Some argue that the UK is particularly at risk of a wage-price spiral contributing to stagflation, which is low or no economic growth and high inflation. This is due to its import-heavy economy, weakness in the British pound, a tight labor market constrained by Brexit, and years of stagnant wage growth. In March, UK inflation was expected to drop into the single digits but came in at 10.1%, with core inflation at 5.7%, which excludes food and energy and is closely monitored by the Bank of England.