The Bank of England’s chief economist has urged people to accept they are poorer, warning that inflation risks remaining stubbornly high.
Huw Pill told a podcast that people and businesses have responded to higher bills and costs by asking for higher wages or charging their customers more money.
His remarks echoed warnings from Bank governor Andrew Bailey that large wage and further cost increases damage the Bank’s efforts to cool inflation.
The headline measure, the consumer prices index, remains above 10% despite consecutive interest rate increases since December 2021 to help cool demand, and therefore the pace of price growth in the economy.
While much of the inflation can be attributed to factors outside the Bank’s control, such as energy and food costs, it is worried about the ability of secondary effects, such as wage increases, making its job more difficult.
Its argument has consistently been dismissed by unions seeking pay deals to help cushion their members from the cost of living crisis.
Inflation is due to ease naturally, and sharply in the coming months, when the effects of the first big energy bill hikes are stripped out of the inflation data.
But the latest official figures showed higher wage increases than expected by economists, causing financial markets to price in that the Bank of England would respond with a further interest rate rise next month.
Mr Pill told the Columbia Law School’s Beyond Unprecedented podcast: “The UK, which is a big net importer of natural gas, is facing a situation where the price of what you’re buying from the rest of the world has gone up a lot, relative to the price of what you’re selling to the rest of the world, which is mainly services in the case of the UK.
“You don’t need to be much of an economist to realise that if what you’re buying has gone up a lot relative to what you’re selling, you’re going to be worse off.
“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 through higher wages or passing energy costs on to customers etc.
“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; to try and pass that cost onto one of our compatriots and saying, ‘we’ll be alright, but they will have to take our share too’.
“That pass-the-parcel game that’s going on here, that game is one that’s generating inflation, and that part of inflation can persist.”