- Huw Pill, chief economist at the Bank of England, told a podcast workers and businesses were in a game of the impact of inflation.
- Pill said inflation was caused by shocks such as the pandemic, the war in Ukraine and crop shortages.
- But he added that people in the UK have to accept that the cost of imported goods has risen faster than the value of exported goods.
A Deliveroo cyclist, a man with an umbrella and two women with a pushchair walk past a derelict shop front on the High Street with white painted windows on February 16, 2022 in Leeds, Britain.
Daniel Harvey Gonzalez | In Pictures | Getty Images
LONDON – Businesses and workers are trying to shift the impact of inflation onto each other – and that risks persistent inflation, according to Huw Pill, the Bank of England’s chief economist.
“What we’re seeing now is this reluctance to accept that we’re all worse off, we all have to take our fair share,” Pill said in an episode of Columbia Law School and the Millstein Center’s Beyond Unprecedented podcast that was released on Tuesday.
“To try and pass that cost on to one of our countrymen and say we’ll be fine but they have to take our share – passing the package game… is one that creates inflation,” he said.
Pill discussed the “series of inflationary shocks” that had fueled inflation over the past 18 months, from pandemic supply disruptions and government support programs for households that boosted demand, to the Russian invasion of Ukraine and the resulting surge in European energy prices . This was followed by bad weather and an outbreak of bird flu, which pushed up food prices.
But Pill said that wasn’t the whole truth, and it was “natural” that the behavior of price and wage-setters in economies like the UK and US would change as the cost of living, like utility bills, rises and workers ask for higher wages and companies that raise prices.
“Of course, this process is ultimately self-destructive,” Pill said.
He added that the UK, which is a net importer of natural gas, is facing a situation where the goods it buys from the rest of the world compare to what it sells to the rest of the world all services, have risen sharply. Britain imports almost half of its food.
“If what you’re buying has gone up a lot compared to what you’re selling, you’re going to be worse off,” Pill said.
“So somehow in the UK someone has to accept that they are getting worse off and stop trying to maintain their actual purchasing power by raising prices, whether that be higher wages or passing energy costs on to customers etc.
Pill’s comments received widespread coverage in the UK media. In February 2022, Bank of England Governor Andrew Bailey came under scrutiny for saying wage negotiations could lead to domestic inflationary pressures and he urged workers and employers to show “restraint” in wage discussions. Bailey’s comments have been criticized by unions for focusing on how wages, rather than corporate profits, can fuel inflation.
The concept of a wage-price spiral, where rising wages create an inflationary loop by raising costs for firms and stimulating demand, is debated in economics. Several policymakers – including US Treasury Secretary Janet Yellen and European Central Bank officials – have said they see no evidence of this in the US or the eurozone.
Economists, including IMF chief economist Pierre-Olivier Gourinchas, have said wages can continue to rise without risking growth as wages have not risen significantly on an inflation-adjusted basis and corporates have maintained comfortable margins.
However, some argue that the UK is particularly vulnerable due to its import-heavy economy, weakness in the British pound and a tight labor market that has been constrained by Brexit.
UK inflation was expected to fall into the single digits in March but came in at 10.1%, with core inflation – which excludes food and energy and is closely monitored by the Bank of England – came in at 5.7% .