Catherine Mann, a member of the Bank of England’s Monetary Policy Committee (MPC), recently expressed concerns about the potential impact of wage growth on inflation in the UK. She warned against being complacent about low inflation levels, as survey evidence suggests that companies are planning to increase both wages and prices in the near future.
Despite the Bank of England cutting the base interest rate to 5% in August after a period of high rates, Mann believes that inflation could rise again soon. She emphasized that the recent decrease in energy prices may have masked underlying inflationary pressures in other sectors of the economy, particularly in terms of wages.
Mann highlighted the fact that strong wage growth might persist, leading to higher services price inflation. She explained that while some workers at the bottom of the pay scale received significant increases recently, those higher up may expect raises next year, contributing to ongoing inflationary pressures.
The former OECD chief economist pointed out that this upward trend in wages and prices could be structural and take years to reverse. Mann suggested that it may take multiple years for wages to align with workers’ expectations, especially given the current labor market dynamics with plenty of job vacancies but a shortage of available workers.
In addition to wage growth, Mann also mentioned the potential impact of global stock market volatility on inflation. She indicated that the uncertainty in financial markets could lead the Bank of England to maintain higher interest rates for a longer period, as there is an inflation premium associated with market volatility.
Looking ahead, Mann’s insights provide valuable considerations for the MPC’s upcoming meeting in September. With economic indicators such as job and wage updates, as well as the headline inflation rate, scheduled for release, policymakers will need to carefully assess the evolving situation to make informed decisions regarding monetary policy.
Overall, Mann’s assessment serves as a reminder that while headline inflation may appear subdued, underlying factors such as wage growth and market volatility could pose challenges in the near future. Policymakers will need to remain vigilant and proactive in addressing these issues to ensure stable economic conditions and sustainable growth in the UK.