part of london
The Bank of England was relatively relieved by data released by the ONS on Wednesday that inflation fell more than expected, not least because it will reduce the pressure on it to keep raising interest rates sharply.
Inflation fell more than expected in June to 7.9%, the lowest level in 14 months, while the annual consumer price index is expected to fall to 8.2% in the month from 8.7% in May.
Inflation in the UK remained higher than in its European neighbours, as inflation in the euro zone slowed to 5.5% in June, in line with expectations, compared with 6.1% in May.
Several factors are affecting inflation in the UK, notably ‘wage growth’ as the inflation debate in the UK is now overly focused on ‘wage growth’ as providers of goods and services pass on higher wage costs to consumers.
Misleading and dangerous!
International economist Mohammad El-Erian said in an article in the Financial Times that “blaming inflation for wage growth is misleading and dangerous”:
- Excessive wage rises are increasingly seen as the sole cause of Britain’s inflation problems, leading to mortgage difficulties and forcing households to make difficult choices as purchasing power falls.
- While this news has recently received attention due to the latest wage data and inflation warnings from the Chancellor and the Bank of England, it is “one-sided” and could easily be “misguided”.
- This is an oversimplification of the inflation challenge and the appropriate policy response. It also increases the risk of recession, exacerbating the current inflation and interest rate crisis.
The latest data showed wages rose at an annualized 7.3% in the three months to May, beating expectations for a 7% increase.
Private sector wages rose 7.7%, outpacing a 5.8% increase in the public sector.
The release of the data pushed market rates higher, while mortgage providers responded to previous hikes by raising the average two-year mortgage rate above 6.6%, a level not seen in 15 years.
salary limit
The data came after both Chancellor of the Exchequer Jeremy Hunt and Bank of England Governor Andrew Bailey called for a “cap on wages”, while Bailey set his sights on a second straight rate hike at the next meeting of the central bank’s Monetary Policy Committee. 0.5 percent opens the door. .
According to El-Erian’s estimates, while the UK inflation debate is now overly focused on ‘wage pay inflation’, with providers of goods and services passing on higher wage costs to consumers, this is unfortunate for three reasons :
- First, it occurs during a period when real wages have been eroded substantially by inflation.
- Second, the drivers of inflation are more complex and diverse than wages. These include: a timid initial policy response to what most central banks have mistakenly described as transitory inflation, paralyzed international supply chains, a tight labor market and some companies prioritizing maintaining profit margins.
- Third, overemphasizing wage restraint as the main tool for reducing inflation increases the likelihood of a recession. This will weaken household demand at a time when already high mortgage costs are becoming a huge burden on households.
El-Erian stressed that the UK must lead other countries in implementing a more comprehensive policy response, an approach that must stimulate the supply side with targeted action to complement higher interest rates and wage restraints.
It must also harness the necessary energy transition, embrace exciting technological innovations, and reassess the best path to lower and stabilize inflation.
But he argues that such an approach would not only reduce the risk of stagflation, but also enhance the prospects for sustainable growth in productivity and expand the country’s growth potential.
It will provide better opportunities to address the long-term challenges of climate change, high debt, low growth, and excessive inequality of income, wealth, and opportunity.
Salary is not the only reason
Jacob Kierkegaard, senior fellow at the Peterson Institute for International Economics, said in an exclusive statement to Sky News Arab Economics that “wages play an important role in inflation because of the narrow UK labor market, but they are not The main factors are as follows:
- The UK labor market has been shaken by Brexit, the pandemic, etc., leading to serious matching problems (higher wage demands).
- The UK public sector has experienced relatively large pay cuts over the years compared to the private sector, meaning that after years of austerity, public sector wage demands are now very steep.
He added: “So it’s not just the desire to overcome falling real wages that is driving UK wages, but also the many long-term economic problems facing London.”
He continued, “Additionally, there is a general lack of skills in many areas due to things like high school dropouts, so these things may not constitute a complete storm, but they are certainly a series of problems. One head at a time.”
On a related note, a senior fellow at the Peterson Institute for International Economics commented on the most recent June inflation data, emphasizing that it was “good news for the Bank of England, as it suggests it doesn’t have to raise rates sharply” rise. “
bank of england
In this context, Tariq Al-Rifai, CEO of Kunlun Strategic Research Center, said in an exclusive interview with Sky News Arab Economics, “The Bank of England is facing more difficulties in this regard than the Fed. And the ECB is bigger.” Inflation rates, especially since inflation in the UK is higher than in the US and EU.
He added, “The Bank of England started raising rates ahead of the Fed, and at a relatively quick pace…but inflation elsewhere started to fall faster than in the UK.” Inflation data showed that inflation fell to 7.9% in June , better than expected, which should ease the pressure on the Bank of England, especially given that inflation has been one of the main challenges this year.
Al-Rifai believes that “one of the reasons why the UK’s inflation rate is higher than its neighbors is (Brexit), especially after the end of the new crown blockade, we have seen the import and product supply business from Europe. difficulties and obstacles, especially in the food sector.”
The Bank of England is expected to raise interest rates for the 14th time in a row on Aug. 3, after raising its key rate in May to 5% from 0.1% in December 2021.
Prime Minister Rishi Sunak pledged earlier this year to halve inflation by the end of 2023 ahead of national elections expected in 2024, and Treasurer Jeremy Hunt Calling this goal challenging.