Bank of England boss Andrew Bailey said workers, many of whom have suffered years of stagnating pay and soaring prices, should not get real-terms wages rises, claiming there is a risk of runaway inflation becoming “embedded.”
Mr Bailey, who earns £575,000 a year including pensions, made the comments a day after he introduced the single biggest rise in interest rates – from 1.25 per cent to 1.75 – since 1995, despite his prediction that the economy is facing the beginning of its longest recession since the 2008 financial crash this autumn.
He also warned that the consumer prices index inflation rate would hit a staggering 42-year high of 13.3 per cent in October, well above the bank’s target of just 2 per cent.
The governor, who refused to be drawn on what an appropriate wage rise would be, is under increasing pressure amid Britain’s “summer of discontent” as rail workers, aviation staff, criminal barristers, Post Office employees and more strike against more than a decade of Tory austerity.
Mr Bailey acknowledged that the poorest are being affected most by the cost-of-living crisis but claimed: “If everybody tries to beat inflation it doesn’t come down, it gets worse.
“My key point is, if inflation becomes embedded and persistent, it gets worse and the effects get worse,” he told BBC Radio 4’s Today programme.
The head of economics at one of the union federations, the TUC, Kate Bell slammed his remarks, saying: “After the longest and harshest wage squeeze in 200 years, working people in every part of the country are suffering a huge fall in living standards as prices soar.
“With incomes set to fall even further and the economy teetering on the brink of recession, it’s now more important than ever that workers need a pay rise.
“Without wage increases, working people will simply stop spending on anything non-essential – and that will hurt our high streets, damage business and make a recession very likely, putting jobs at risk up and down the country.
“Making sure people can put food on the table for their family is not going to push up inflation.
“’If the governor is worried that some workers might miss out on negotiated pay rises, he should encourage all workers to join a union.”
Labour MP Richard Burgon urged working-class people not to be intimidated, tweeting: “They don’t call it class war when they cut wages.
“They don’t call it class war when they slash benefits; they don’t call it class war when they hike prices – they only call it class war when people fight back.”
Economic think tank the Institute for Fiscal Studies echoed these concerns, and stressed that the winner of the Tory leadership contest between Rishi Sunak and Liz Truss needs to “find billions” to save vital public services including the NHS.
Director Paul Johnson said: “We are looking at potentially big real-terms cuts to some of the public services that are really struggling at the moment.”
Pat Harrington, General Secretary of Solidarity union, said: “The argument that higher wages automatically lead to inflation (higher prices) is false. It doesn’t take into account the relationship between wages and profits or costs and how far a company can raise its price without a backlash. To explain, very simply, a rise in wages obtained by workers, enabling them to meet the rising cost of living or better still to improve their standard of living, comes at the cost of less profit per unit of output for companies. This means they have less to spend on their own private consumption and/or to reinvest and expand production beyond what they have already produced. Clearly a lack of investment in research and development would have long term consequences but our current period of inflation is created by supply chain pressures mainly and can be solved fairly quickly given government action.
In most circumstances, the competitive pressures between rival capitalists in all sectors force a general alignment between the price of products and inputs of living labour and raw materials, energy, machine depreciation etc – companies can’t simply raise prices. Additionally, consumers can switch their buying preferences to leave companies that try to raise prices (few have monopolies).
A hit on the profits of companies is socially preferable to real-term wage cuts.“