There will be no return to a 1970s-style inflation spiral as wage increases are eaten up by the rising cost of vital goods, high-ranking Bank of England politicians said.
Some economists have warned that wage increases due to labor shortages could create a “wage price spiral” in which higher wages drive up goods prices and prompt other workers to demand their own wage increases.
Three of the bank’s most senior figures told the Treasury Select Committee that such a scenario – which played out in the late 1970s – is not likely today.
“There is no danger of a wage-price spiral in the UK,” said Michael Saunders, an external member of the bank’s nine-member rate fixing committee. “Talking about a return to the 70s is completely out of place.”
“The economy has changed in many ways since then, and another major change is institutional policymaking, with an independent central bank, a clear mandate and an effective set of tools.
However, he said he voted to withdraw some of the bank’s stimulus measures because the labor market was “tight” and average wages had risen.
Mr Saunders was in the minority who voted to tighten monetary policy last week who created money in the financial markets.
Bank of England Governor Andrew Bailey said the labor market situation was “very different” from more than four decades ago.
“The collective bargaining position varies a lot,” Bailey said, referring to the sharp decline in the proportion of workers who are union members.
When asked if an inflationary spiral was likely, Mr Bailey said, “We are very far from the 702, shall we say so.”
Catherine Mann, another member of the bank’s monetary policy committee, told MPs on Monday that businesses may not be able to pass the rising cost of materials and labor on to customers as consumers will not have additional disposable income despite wage increases in some sectors.
“Will consumers spend enough on goods and services if part of their wallet is spent on energy and food? The answer probably isn’t and so companies can question any future cost increases one-to-one on their prices.”
The bank has been urged by some analysts to hike rates to cool the economy and lower inflation, but has so far resisted. Any move to hike rates would be controversial as the economy is still smaller than it was before the pandemic and the latest data shows that growth has slowed.
Mr Bailey defended the guidance he had given prior to the bank’s recent interest rate decision. His words had been interpreted as a sign that the bank was ready to raise interest rates. Mr Bailey maintained his claim last month that the bank “must act” if inflation stays above target over time.
The statement was “subject to change” and merely a repetition of the bank’s public mandate to keep inflation close to the target rate of 2 percent.
Mr Bailey said the decision to hold rates was “very close,” but stressed that he never said the bank would raise rates at the meeting.
“As a guide, in terms of emphasizing the primacy of the inflation target and the link to medium-term inflation expectations, I felt it was crucial that we gain a foothold on this point,” he said.