Andrew Bailey, the Governor of the Bank of England, recently expressed concerns about a possible wage-price spiral in the UK. He indicated this situation is somewhat driven by the indirect repercussions of elevated energy prices, as well as by 'second-round effects' such as salary growth and price setting. While he acknowledged the UK's struggle with this issue, he insisted that the nation is not currently trapped in a wage-price spiral.
A poll of economists had predicted the UK's consumer price index inflation to be 8.2%, but it landed at 8.7%, remaining higher than expected. Despite this, core inflation, which excludes volatile components like food, drink, energy, and tobacco, actually saw an increase. Meanwhile, food price inflation remained steady at an almost 45-year high of 19%. These factors have led to expectations among financial market participants that further interest rate increases are imminent, with rates potentially rising to 5.5% by November.
However, Frank Douglas, CEO of Caerus Executive, warned against rapid reactions from employers in response to Bailey's remarks. He argued that curbing wage increases is not the solution to this issue. Instead, he suggested that the answer is more nuanced and involves measures such as increased investment in mental healthcare, reversing the impact of Brexit on labour mobility, and controlling excessive corporate profits.
Furthermore, data from the Office for National Statistics showed average regular pay growth was 6.9% for the private sector and 5.3% for the public sector from December 2022 to February 2023. This led Fiona McKee, director of HR consultancy The HR Practice, to question whether the UK is indeed experiencing a wage-price spiral, given that the average salary increase was only 6.6%, far below the inflation rate of 10.1%. She also warned that if inflation continues to affect the cost of living, businesses might have to reduce their workforce to cut costs, which could in turn impact productivity.