The Bank of England’s chief economist has a harsh message for Britons: “Someone needs to accept that they’re worse off.”
Speaking on a podcast, Huw Pill said there had been a reluctance by workers and companies in Britain to accept they are poorer, primarily as a result of Europe’s energy shock.
Instead, he said, workers are trying to pass along rising costs to employers by demanding higher wages, while companies are passing on their higher expenses to customers. That “pass-the-parcel game,” he said, is generating inflation that could be persistent.
Mr. Pill, who is responsible for the analysis that the central bank uses to make its interest rate decisions, made the comments on an episode of “Beyond Unprecedented: The Post-Pandemic Economy,” a podcast series by Columbia Law School, which was released on Tuesday.
The remarks have fallen flat in Britain as the country has been grappling with a cost-of-living crisis for the past year. The annual rate of inflation has been stubbornly above 10 percent since last summer, much higher than in the United States and Western Europe. In response, the central bank has raised interest rates to 4.25 percent, the highest since 2008, with the effect of higher rates on mortgages and other loans.
Household energy bills are more than double what they were two years ago, while many households also struggle to afford groceries. Food inflation is about 19 percent, the highest annual pace of price increases in more than 45 years.
The comments were quickly followed by indignation.
“You need to accept you are poorer!” The Daily Mail splashed in large letters across its front page on Wednesday, adding that Mr. Pill earned £190,000 (about $237,000) a year. (Bank of England data showed that Mr. Pill was paid more than £88,000 from September 2021, when he joined the bank, to the end of February 2022, with additional benefits, implying an annual salary that year of about £190,000.) Other newspapers had similar headlines.
Mr. Pill joined the Bank of England less than two years ago from Harvard Business School. He previously worked at Goldman Sachs and the European Central Bank.
As energy costs have fallen, the expectation in Europe is that overall inflation rates should also drop relatively quickly this year. The Bank of England forecasts the inflation rate to fall to about 4 percent by the end of the year. But policymakers remain wary of domestic price pressures, which could encourage them to keep interest rates relatively high.
In the podcast, Mr. Pill was asked to untangle how much current inflationary pressures were transitory or durable. Britain had been hit by a series of shocks — the pandemic, higher energy pressures caused by the war in Ukraine, a disrupted food supply — which were individually transitory but came so close together that inflation never waned.
He added that there was another factor at play. Britain, which is a big net importer of natural gas, faced a big increase in the price of what it was buying from the world compared to what it was selling, mainly services. That changes the country’s economic health.
Here’s what he said:
“You don’t need to be much of an economist to realize if what you’re buying has gone up a lot relative to what you’re selling, you’re going to be worse off.
So somehow in the U.K., someone needs to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether higher wages or passing the energy costs through onto customers.
And what we’re facing now is that, that reluctance to accept that — yes, we’re all worse off and we all have to take our share — to try and pass that cost onto one of our compatriots and saying, we’ll be all right but they will have to take our share too. That ‘pass-the-parcel’ game that’s going on here, that game is one that is generating inflation, and that part of inflation can persist.”
It’s not the first time a Bank of England official has been criticized for indelicate suggestions on how to hold down inflation. Early last year, Andrew Bailey, the governor of the bank, said that there needed to be “restraint in pay bargaining” so inflation didn’t get out of control.
Some European Central Bank policymakers have expressed a similar concern, though in gentler terms and more focused on the behavior of companies. Europe has also experienced a large so-called terms-of-trade shock, in which the price of an essential imported good, energy, surged. That has left the economy poorer, and European policymakers have urged companies to accept some losses, just as workers have had to accept lost real earnings.
“It is important that there is fair burden sharing” between firms and workers, Christine Lagarde, the president of the European Central Bank, said last month.
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