Can you see it yet?

[Wales-Bales]

Andrew Bailey's inflation disaster is only getting started

After months of frantic scapegoating Threadneedle Street has few others left to blame

For over a year now, Andrew Bailey has scratched around for causes of Britain's inflation crisis which don't involve the Bank of England or its Monetary Policy Committee. It's not been an easy task, given his institution is responsible for ensuring price stability.

Bailey found himself in hot water last February after calling for “quite clear restraint” on the part of employers and employees during pay negotiations at a time when inflation was 6 per cent on the year – triple the Bank's target.

Undeterred, he this week triggered another backlash by blaming wage demands for continued inflation.

The Bank of England governor has been hinting for over a year now that he fears a wage-price spiral: that dreaded (and expensive) loop in which salaries go up in response to inflation, leading to another round of price hikes.

On and on it supposedly goes.

He may be more cautious now about how he words his warnings than he was in 2022, but he is repeatedly issuing them.

During an oral evidence session earlier this year, the governor told the Treasury Select Committee that “inflation is going to fall very rapidly,” which needed to be “taken into account” when setting pay.

In simpler wording: beware the impact of higher wages, especially if you want to get the rate of inflation down fast.

But this is the first time in the inflation saga that the governor has explicitly said a wage-price spiral is taking place in the UK.

Speaking to a group of business leaders in London, he insisted that the “second round effects” of inflation – that is, higher wages – are now contributing to the slower fall in the inflation rate than had been predicted at the start of the year.

This has the potential to be a compelling narrative. After all, regular pay growth (which excludes bonuses) averaged 7pc for private sector employees between January and March this year; for public sector employees, average pay grew 5.6pc.

Lots of people know they’ve had a pay raise, but they are also struggling to keep up with their weekly costs and monthly bills.

So perhaps it’s their wage requests and their pay hikes that have contributed to higher prices that are now causing inflation?

Persuasive it may be, but it's simply not true. Worse, this narrative tries to pass responsibility onto businesses and workers, who are not the culprit.

Claims around wage spirals have largely been debunked: raising employee salaries cannot alone cause inflation. Rather, lagging wage hikes can reflect the gradual adjustment to too much money sloshing about.

Yes, you can get many rounds of both wages and prices going up as inflation filters through. It might look like one causes the other.

But without a significant increase in the money supply – boosting aggregate demand – one person being paid more would – in normal times – simply mean less money and demand elsewhere.

It’s far more likely then, that the hundreds of billions of pounds of money-printing that the Bank undertook during the pandemic (printing more money in the first year of Covid than it did in the decade running up to it) is the primary cause of inflation, not pay increases.

As the Cato Institute's Ryan Bourne rather succinctly summed it up last year, targeting wage growth as the problem after record expansion in the money supply is akin to “lamenting gravity as the cause of hurtling to the ground after someone has thrown you from a plane”.

Moreover, the wage increases we’re seeing are nowhere near what occurred in the 1970s, when wage growth could match or even outpace inflation at well over 20pc.

Today’s wage increases fall behind the rate of inflation. Those 7pc pay boosts on average are being eaten up by price hikes. So wages, in real terms, are falling: your average worker is actually feeling 3pc worse-off.

Bailey has keenly referenced the pandemic and Russia’s illegal war against Ukraine as among the causes of inflation.

Both have been big contributing factors, no doubt, but he has always avoided talking about the Bank’s own monetary policy decisions, and its addiction to cheap and easy money, as another critical factor leading to double-digit inflation.

Yet the governor’s decision to formally add a wage-price spiral to his list is curiously timed. Next week we will learn the inflation rate for the year up to April 2023.

Last month – and spring more broadly – has been built up by the Bank as a very important crunch point: roughly the moment when the data should show the rate of inflation starting to fall rapidly.

The consensus is that April will see some significant movement.

What’s worrying, however, is that in the Monetary Policy Committee’s report earlier this month, the Bank actually upped its inflation forecast: from the rate falling to 3.9pc on the year in December 2023, to 5pc instead.

It is true that energy prices are falling – and fast. But unexpected rises in other domestic services and food costs keep offsetting it. Poor predictions are nothing new.

The Bank has repeatedly underestimated inflation in its forecasts – a very expensive mistake.

It believed inflation would start coming down early this year, which is presumably why, when Number 10 made its five pledges at the start of the year, it confidently included the promise to “halve inflation”.

Instead, the rate has hovered in the double digits for six months now – at 10.1pc on the year in March – making Britain an increasingly ugly outlier, especially compared to countries like the United States.

Bailey could be hedging his bets, and in one of two ways. First, a gloomy prediction which turns out to be wrong tends to elicit less criticism than an optimistic one.

More likely, he is aware that scrutiny on the Bank and its failure to keep the inflation tiger in the bag is intensifying.

It insisted that inflation was “transitory” as it skyrocketed, and has been too slow to hike rates to get prices under control.

People have been feeling the pain of both higher prices and higher rates for months. And the Bank has very few new excuses behind which it can hide (which is probably why they're repeating old ones).

A wage-price spiral might be the latest attempt to distract from what are now glaringly obvious failures in monetary policy. But the evidence is weak that even such a phenomenon is happening.

Responsibility for the inflation crisis falls squarely at the Bank of England's feet. Workers already have to deal with the terrible consequences of its failures. They should not be falsely accused of making inflation worse for simply getting a pay increase.
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https://www.telegraph.co.uk/business...tion-disaster/

[jon1959]

What are we supposed to see?

Parts of that Telegraph article are good - and well worded. Unusual for the Telegraph to echo the TUC so closely in rubbishing the wage-inflation false narrative (peddled by the Government and echoed by the Opposition) but welcome.

Although it also appears to be a contribution to the Tory Right vs The Bank Of England propaganda war.

Of course printing money is inflationary (usually mitigated by ramping up interest rates) but I understood that not just the UK but the USA, Japan, the whole Eurozone as well as swathes of countries from the global south were printing money at record levels when Covid control measures hit economies everywhere.

Did the Bank Of England print significantly more? If not (I don't know - but you surely must) why is UK inflation running at 2x to 3x the rate of most other major economies (discounting outliers like Turkey and Argentina)?

So what are we supposed to see?

[Wales-Bales]

So what are we supposed to see?

A likely destination.

[jon1959]

A likely destination.

Which is?

[Wales-Bales]

Which is?

Keep your eye on the unelected leader, I think he may be the fall guy here.

[jon1959]

Keep your eye on the unelected leader, I think he may be the fall guy here.

What are you on about?

Have you ever answered a straight question?

Save us the deflection, evasions, cringeworthy ITK smugness, and outright cowardice.

Why are you scared to explain your sub-cryptic nonsense - is it because there is nothing there? All fur coat and no knickers?

Is the big reveal that Sunak is about to be 'the fall guy' because he was conned into believing UK inflation would fall further and sooner than in fact it will? Is it that the Bank Of England have set a trap for him? Is it all part of some sinister masterplan (not a continuing series of cock-ups)?

If so - WHY? What are we supposed to see?

[Wales-Bales]

What are you on about?

Have you ever answered a straight question?

Save us the deflection, evasions, cringeworthy ITK smugness, and outright cowardice.

Why are you scared to explain your sub-cryptic nonsense - is it because there is nothing there? All fur coat and no knickers?

Is the big reveal that Sunak is about to be 'the fall guy' because he was conned into believing UK inflation would fall further and sooner than in fact it will? Is it that the Bank Of England have set a trap for him? Is it all part of some sinister masterplan (not a continuing series of cock-ups)?

If so - WHY? What are we supposed to see?

You think he's running the show? Interesting

[jon1959]

You think he's running the show? Interesting

I think who is running 'the show'?

And what show? Are you trying to say the anti inflation strategy (if there is one), or the UK economy, or the meaning of life, the universe and everything?

Or are we back to the Organ Morgan reading of the WEF masterplan to depopulate the world, place Bill Gates chips in the remaining black eyed slave labour pool, and cosset the elite rulers in a massive bunker under Dallas?

And the 'who'? Sunak? Bailey? Organ? Schwab? Give me a clue because I haven't referred to anyone running any show?

[the other bob wilson]

You think he's running the show? Interesting

You’re too frightened to answer a straight question? Boring.

[Wales-Bales]

You’re too frightened to answer a straight question? Boring.

I think it will be far from boring when the current events reach their logical conclusion.

[cyril evans awaydays]

I think who is running 'the show'?

And what show? Are you trying to say the anti inflation strategy (if there is one), or the UK economy, or the meaning of life, the universe and everything?

Or are we back to the Organ Morgan reading of the WEF masterplan to depopulate the world, place Bill Gates chips in the remaining black eyed slave labour pool, and cosset the elite rulers in a massive bunker under Dallas?

And the 'who'? Sunak? Bailey? Organ? Schwab? Give me a clue because I haven't referred to anyone running any show?

Doubt it is Organ Morgan as it appears he has been ASBO'd.

[jon1959]

Doubt it is Organ Morgan as it appears he has been ASBO'd.

Again? You know what happens when the disciples are left to their own devices.