Bailey Expresses Concern with Wage-Price Spiral

Bailey emphasised that the tight labour market was still a key driver of inflationary pressure in the UK, and that the economy was subject to a wage-price spiral. Here, he stated that “the outlook for inflation further out is more uncertain and depends on the extent of persistence in wage and price setting”. Bailey’s comments follow Tuesday’s data print which indicated that public sector pay rose at its the greatest level in 20 years. This comes as private sector pay grew by 7% including bonuses and 6.7% excluding bonuses but given inflation represents 3% real terms cut in the year to January to March including bonuses and 2% excluding bonuses.

Last month the Bank of England’s chief economist stated that British households must accept that they’re worse and stop pushing for higher pay as real wages fall at their fastest rates for 20 years. In a nod to concerns over a wage-price spiral, Huw Pill stated that people “need to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether [through] higher wages or passing the energy costs through onto customers”.

Eurozone Inflation Increases to 7%

Yesterday morning, eurozone headline inflation came in line with expectation at 7% showing a slight increase from the previous month. April’s inflation level follows the ECB’s 50bps rate hike in March, with the increase reiterating the scale of the challenge that Frankfurt faces in brining inflation back down to their 2% target. Inflation across the services sector rose 5.2%, demonstrating the prevalence of ‘sticky’ inflationary pressures which continue to embed themselves economy. This was also evident with the core index remaining just 0.1 percentage points off the all-time high of 5.7% seen in March, though April’s level came in marginally softer-than-expected.

The ECB’s inflation rate follows a poll conducted by Reuters on Monday which explored economists’ expectations for Frankfurt’s next rate decision on 15 June. Out of the 62

economists polled, all took the view that the ECB would hike in June, though 20 of the respondents maintained that the ECB would cease from further hikes. Conversely, 42 saw a further 50bps of rate hikes with five of these deeming that there was 75bps of hikes left before the ECB reached their terminal rate. Yesterday’s inflation print comes as borrowing costs are at their highest level since 2008 across the Eurozone after seven consecutive rate hikes. On Monday, Brussels upwardly revised their inflation expectations. The commission is now expecting inflation to average 5.8% over 2023, a raise of 0.2 percentage points. Next year’s inflation predictions were similarly raised, increasing from 2.5% to 2.8% with core inflation dropping from 6.1% this year to 3.2% next year.

As such, all eyes are now on the ECB’s rate decision on 15th June and any rhetoric from policy makers in the run up to it to better predict their next course of action.