UK wage growth still a concern for inflation

The UK should not be “seduced” into believing that the fight against inflation is over following a brief decline in the headline measure targeted by the Bank of England, cautioned Catherine Mann, an external member of the central bank’s monetary policy committee. Despite the main inflation rate holding steady at the BoE’s 2 percent target in June, Mann expressed ongoing concerns about potential upward pressures on inflation. She warned that prices for goods and services are likely to rise again and that wage pressures could persist for years. Survey data indicated that companies still anticipate making significant increases to both wages and prices, which she interpreted as a potential issue for the coming year. In recent annual pay negotiations, while some lower-wage workers received notable raises—justifiably so—those above them did not, suggesting they too would seek increases next year. Similarly, companies often observe their competitors raising prices and feel compelled to follow suit. “There is an upward ratchet in both wage-setting and pricing processes, which may be structurally embedded due to the high inflation experienced over the past couple of years,” she added. “This upward pressure will take considerable time to unwind.” Mann’s remarks came ahead of a week filled with UK data releases anticipated to show a continued rise in economic activity, alongside consumer price inflation potentially climbing back above the BoE’s target to 2.3 percent, as household energy bills stabilize. The former OECD chief economist is one of four MPC members who voted to maintain interest rates earlier this month, diverging from the majority decision to reduce the benchmark borrowing rate for the first time since the Covid-19 pandemic began, from 5.25 percent to 5 percent. Mann, who has consistently advocated for tighter monetary policy than her colleagues on the MPC, noted that her stance has shifted from a score of 10 to 7 on a scale of “hawkishness” since the beginning of the year as price pressures have started to ease.