It is not entirely clear whether the Bank of England’s chief economist knew how much he would be caught in the crossfire, but one thing is certain: Huw Pill unleashed a veritable storm of indignation in Great Britain. The Daily Mail summed up the furor on her front page: “Furry when the £190,000-a-year chief banker tells the rest of us: You have to accept that you are poorer!” Apart from the fact that the country’s best-selling tabloid started a debate of envy, the headline certainly hits the point made by the chief economist.
Pill spoke in a podcast from New York’s Columbia University on the consequences of high inflation, which is still plaguing Great Britain more than comparable economies. Unlike in Germany or France, the inflation rate in the UK is still in the double digits, at 10.1 percent according to the latest figures. So Pill was saying that people and businesses in the UK had to accept that they were, quite simply, worse off. One must stop trying to maintain real purchasing power by raising wages and prices.
Nobody from the Bank of England has ever publicly expressed what the central bank fears as clearly as Pill: If companies and trade unions do not moderate themselves, inflation could remain at a high level for longer. In any case, Pill warned the companies against passing on the energy costs to their customers by charging higher prices. And he indirectly called on the workforce not to exaggerate with their wage demands.
The big concern: a wage-price spiral like back in the 1970s
Pill’s big concern is that as wages rise, prices will continue to rise and the economy will enter a wage-price spiral that will be difficult to break out of. Just like in the 1970s. To avoid such a scenario, the Bank of England is likely to raise interest rates further at its next meeting next week. At 4.25 percent, it is already higher than that of the European Central Bank at 3.5 percent.
The prospects for the Conservative British government are not good. At the beginning of the year, Prime Minister Rishi Sunak promised to halve inflation. But four months later, not much has happened. No wonder the Tories are far behind the Labor Party in the polls. With local elections taking place across much of England this week, it will become clear just how much blame the Conservatives have for the current economic situation. According to surveys, the high cost of living is the topic that worries people the most.
Who wants to understand how much the cost of living crisis masters everyday life, only has to go to a supermarket. In order to know which foods are particularly expensive, it is worth taking a look at a list from the consumer protection organization Which?, which shows how much the prices have risen within a year. Butter and milk plus 25 percent. Baked goods up 20 percent. Vegetables and meat up 13 percent. Along with electricity and gas, food costs are the biggest price drivers in Great Britain.
After all, there are now tomatoes and lettuce in the supermarkets again
At least the situation on the vegetable shelves has eased again. Tomatoes, heads of lettuce and peppers were in short supply in British supermarkets during the winter. This was partly due to the bad weather and partly to the consequences of Brexit. The British exit from the EU has not only caused food prices to rise. Costs for companies trading across the English Channel have risen significantly because of customs bureaucracy. In addition, the pound sterling is no longer as strong compared to the euro – and especially to the US dollar – as it was before the Brexit referendum. The result: imports have become more expensive.
No wonder the mood in the country is changing. According to surveys, the majority is now critical of Brexit. This hasn’t escaped Sunak’s notice, and so the prime minister is trying to improve relations with the EU again. Now that the dispute over Northern Ireland has been resolved, there is another signal from London that has been very positively received in Brussels. The British government intends to abandon its plan to review or scrap all EU legislation that is still in force by the end of the year. The corresponding law (Retained EU Law bill) is to continue to come into force, but de facto the government wants to approach the matter “pragmatically”.
Business Minister Kemi Badenoch said, much to the annoyance of hardcore Brexiteers, most of the nearly 4,000 EU pieces of legislation that remain in place remain untouched. By the end of the year, 800 might be abolished, she said. In any case, the government wants to remove a sunset clause that has been envisaged so far, according to which EU legislation would automatically expire at the end of the year if it is not revised or maintained by then.
Unlike Truss and Johnson, Sunak relies on cooperation with the EU
The December 31 deadline alarmed the British economy. Business associations and trade unions were already fearing a new phase of uncertainty. Now this danger seems to have been averted. The EU regulations that are still in force are not just about product standards, but also about consumer protection rules and employee rights.
Even if Sunak still praises Brexit in public appearances, he has long since changed course towards the EU. Unlike the two ex-Prime Ministers Liz Truss and Boris Johnson, he is cooperative with Brussels. The time of constant confrontation is over. And Sunak’s calculus is pretty clear: If he wants to have a chance in the lower house elections next year, he has to give the credible impression that only he can get the economy, which has been hit by Brexit, running again.
It won’t be easy. There have been strikes in all kinds of sectors in Great Britain for months, and nurses again went into action on Monday. The employees of the national health service NHS demand a wage increase in the amount of the inflation rate, i.e. double digits. The government rejects this, hoping that inflation will fall significantly by the summer – and with it wage demands. Whether the plan works remains to be seen. In any case, the Bank of England also assumes that the inflation rate will fall in the coming months. The only question is how fast and how strong.
High inflation aside, there is another concern in the UK: weak growth. The forecast by the OECD at least gives little hope. Accordingly, there should only be two countries among the G-20 countries whose economic output is shrinking this year: Great Britain and Russia.