Bank of England says wage-price spiral has taken hold

Bank of England governor Andrew Bailey warned the UK is already experiencing secondary inflation effects as higher prices caused by supply chain disruption and high energy costs have given way to price increases caused by employers needing to cover higher wage costs. The latest UK employment data shows the jobs market remains robust. The employment rate has ticked up slightly as some people who chose to stop working during the Covid pandemic return to employment. Wages continue to rise at a much faster rate than in recent years, as average private sector wages increased by 7%.

Last week, the Bank of England raised its forecast for inflation. It now expects inflation to remain above 5% this year and not to return to target until 2025. Andrew Bailey’s comments this week opened the way for further rate hikes as he promised the bank would raise rates as far as necessary to get inflation back to target. His comments contributed to a decline in gilts as the yield on 10-year UK government bonds rose to the highest level this year.

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