UK inflation is taking “much longer than expected” to ease, the Governor of the Bank of England admitted yesterday.
Speaking to the House of Lords economic affairs committee, Andrew Bailey stressed that Britain’s labor market was “very tight”, with some companies “bulking” staff to avoid having to hire new staff from a shrinking pool.
While there are signs that the supply of workers is recovering, Mr Bailey said it was happening “very slowly”, causing wages to rise quickly and fueling inflation.
“Employers are saying that it’s so hard for them to hire in this market that they’re not going to lay off labour, they’re hoarding labour.” They will adjust hours if they need to, but they will be reluctant to lay people off,” he said.
Mr Bailey added: “We still think inflation will come down, but it’s taking a lot longer than expected.”
The governor also revealed that food price inflation, which was near a record high of 19.1 percent in the year to April, was proving more resilient than expected.
But Mr Bailey said food retailers had been inaccurate when they told the bank about the state of prices in the sector.
“Retailers have told us more than food manufacturers that inflation will ease.
Then the contact comes back later and says, “Sorry, we got that wrong,” he said.
His comments came after official data revealed UK wages rose 7.2 percent in the three months to April, their fastest pace on record outside the Covid-19 pandemic.
This was accompanied by the employment rate reaching a record 76 percent, while the unemployment rate fell to 3.8 percent from 3.9 percent.
Danny Hewson, head of financial analysis at investment firm AJ Bell, said: “The fear of finding new skilled workers is preventing many employers from shedding staff.”
She added that with rising food costs and the prospect of “impossible increases in mortgage payments”, many employers saw wage increases as “the only way to keep valuable staff on board”.
But Ms Hewson warned that wage increases were helping to drive up prices.
“Wage increases have helped cushion rising costs to some extent, but they’ve also helped keep purchasing power up, and that’s just fueling the very thing that’s causing all the pain in the first place,” she said.