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4 February 2022

Why the Bank of England doesn’t want you to get a pay rise

The fact that Andrew Bailey is prepared to warn against pay rises is a sign of how worrying inflation has become.

By Will Dunn

It’s nothing personal, but Andrew Bailey, governor of the Bank of England, would rather you didn’t get too much of a pay rise this year.

“I’m not saying don’t give your staff a pay rise,” Bailey told the BBC’s Today programme this morning (4 February), “this is about the size of it, frankly – show restraint.”

This comment may understandably have caused some tea to be expelled across the nation’s breakfast tables. Less than 24 hours earlier, the Bank had issued a warning that real post-tax incomes would decline by 2 per cent this year, the biggest squeeze on the cost of living since records began (in 1990), and Ofgem had announced that the energy price cap would rise by almost £700 a year for 22 million households. Read the room, Andrew!

Tempting as it is to observe that Andrew Bailey, who was paid £575,538 last year, can afford an extra £700 on his heating bill, the Bank isn’t just being mean. The only reason Bailey would make such an apparently tin-eared comment is that he has clearly decided there is a risk that inflation will develop into a “wage-price spiral”. This was the pattern that inflation followed in the Seventies, when, like today, there was a spike in the cost of energy, which made everything more expensive. This caused people to bargain for higher wages, which kept consumer demand high, which meant prices could rise still higher.

This is a change of tune for the Bank; in November, when Bailey was asked by the Treasury Select Committee if he agreed with Michael Saunders, one of the Bank’s rate-setters, that there was “no risk of a wage-price spiral”, he responded: “Michael is right: it is a rather dramatic term from the past. We are a very long way from the Seventies.”

When I asked the HR services company XpertHR, which gathers data on several million pay reviews in the UK each year, if pay was likely to keep up with inflation (which the Bank now forecasts will hit 7.25 per cent) this year, the response was unequivocal: “It definitely won’t.” From the pay review data the company has gathered so far, the forecast median pay deal is 2.5 per cent for 2022; it hasn’t been above 3.5 per cent for 30 years.

[See also: Rishi Sunak’s help comes far too late for Britain’s fuel poor]

It’s also true that wages in the UK were pushed up in the Seventies by something that no longer exists: powerful unions, which could cease production or (in the case of a quarter of a million mine workers) turn off the lights across the country if they didn’t like their pay deal.

So why is the Bank suddenly concerned that things are starting to look a bit Mott the Hoople? (For younger readers: this is a musical act from the Seventies.) While the average pay award isn’t going up by much, there are areas in which pay has risen much more steeply. Job areas in which there is a shortage, such as HGV drivers, are securing pay rises of 15 and 19 per cent.

There is also what some have called a “white-collar labour shortage”, although recruiters have told me that this isn’t so much a lack of workers as a new attitude among employers, who are aggressively recruiting the most highly qualified new workers, but have little interest in anyone else. This is an effect of the so-called Great Resignation, in which one in four workers are reconsidering their jobs: companies are opting for the short-term cost of bringing in the people they want, rather than the long-term cost of training and developing them (why bother, when half of them are yearning for a simpler life knitting pet cardigans in Somerset?).

For a lucky few, then, pay is booming – newly qualified lawyers at Linklaters start on £107,500 – but employers seem to be responding ruthlessly to a decline in loyalty.

If companies continue paying over the odds to secure workers they can’t find or don’t want to produce themselves, there is a danger that the market will bid up wages as unions once did – for some workers at least.

The other worrying aspect of the current period of inflation is that it is “exogenous” – the result of global factors. Andrew Bailey does not have a say in whether Russia invades Ukraine (which will make gas even more expensive), or whether shipping costs stay high, or whether the supply of semiconductors to Asian factories is restored. He can raise interest rates, but slowly and in small increments. If these global factors keep forcing up prices in the UK, employees will become even more restive and businesses will need to choose between issuing pay rises or not having any workers, which is rarely a recipe for success.

The fact that Andrew Bailey is prepared to go on the radio now and suggest you shouldn’t have much of a pay rise is a sign of how worried he now is about inflation becoming uncontrollable. It remains to be seen whether employers will listen – or if they’ll have any choice.  

[See also: Why inflation could break Britain]

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