The Bank of England is expected to hike interest rates this week in order to counter the wage-price spiral. In December the BoE acted decisively in order to prevent wages running higher to meet the rising cost of living expenses. Whereas most central banks consider that inflation is transitory it is a wage-price spiral that could ‘bake in’ in inflation into our economy. It was a risk before the meeting and here is what I wrote after the BoE’s decision:
The rise in wages this week will have been a pressing concern to the central bank and may have prompted them to pull the trigger to contain wage growth. Bank staff continue to estimate that underlying earnings growth has remained above pre-pandemic rates, and the Committee continues to see upside risks around projection for pay in the November report.
What is the wage-price spiral?
It is simply inflation that is driven by wages. Higher wages lead to higher prices. This in turn leads to more higher wages which lead to even more higher prices. The wage-price spiral is a constant chase higher. The end result is that you have inflation in a big way. You see that this kind of inflation has nothing to do with supply chain issues. Yes, a supply chain issue may have started off the inflation. However, inflation can then just be driven by wages. When you add into this mix high energy prices you can see that inflation is a genuine fear for central bankers.
Goldman Sachs says the BoE will now ‘get serious’ on inflation
It is the concerns outlined above that have Goldman Sachs upgrade their projections for the BoE this week. Goldman Sachs expect the Bank of England to raise interest rates three times this year. This would be the quickest interest rate hike move in 25 years. However, the BoE know that they will be the first defence in the battle against inflation. Hiking interest rates is the only weapon against rising inflation.