by Britain should not be fooled into thinking the battle to contain inflation is over, even as price increases approach the Bank of England’s target, according to a Bank of England interest rate expert.
Catherine Mann, a member of the bank’s monetary policy committee, said underlying price pressures in the economy remained strong and showed that the central bank needed to take a tough stance in setting interest rates.
Mann, one of four politicians who opposed this month’s cut in Britain’s base rate from 5.25% to 5%, said services inflation remained too high for comfort and wages in Britain were rising faster than the Bank’s forecasts had predicted.
Headline inflation remained stable at the Bank’s target of 2% in May and June, but official figures released on Wednesday are expected to show that inflation rose to 2.3% in July.
She said: “We should not be seduced by overall inflation.” Falling energy and goods prices have reduced average inflation to two percent, but they remain volatile and could push it up again.
Speaking on the “Economics Show with Soumaya Keynes” podcast released on Monday, Mann said that while the cost of services has been rising by more than 5 percent per year, inflation in the goods sector has been falling, she believes this is not consistent with keeping the inflation rate at 2 percent on a sustainable basis.
Mann expressed concern that there would be an upward effect in the services sector, as prices for services rarely fall. In contrast, prices for goods have in some cases fallen back to levels almost equal to pre-pandemic levels.
Part of this process is “the desire to maintain certain wage ratios,” she said, suggesting that the almost 10 percent increase in the minimum wage in April had put pressure on companies to raise wages in the upper income groups.
Mann said: “There were a lot of new collective agreements in April this year. Next year there will be collective bargaining that is in line with the negotiations that have just taken place. So some people at the lower end of the pay scale have gotten quite a pay rise, and rightly so.”
“But those above them have not done so, which means they will do so next year, because it is important to keep relative wages within a hierarchical structure, in some way related to each other.”
Manufacturers could also use ratchet technology to drive up prices, Mann stressed – but it could take a long time for these to be “reduced”.
She said: “Companies look at their competitors and their competitors raise their prices a little bit. Maybe they are more efficient. They raise their prices a little bit and their competitors raise them too. We don’t see any such downward behavior.”
after newsletter campaign
Mann said there would be more persistent inflation shocks around the world, affecting the cost of British goods. A more volatile world would force central banks to keep interest rates high for longer to avoid a further rise in inflation that ruins household living standards.
She feared that higher shipping and transportation costs would depress the price of goods that are either produced in or have to be transported through conflict zones.
Asked how cautious she would be about further rate cuts on a scale of one to 10, Mann put her assessment at seven – down from 10 in the days when she voted to raise the benchmark interest rate above the recent 16-year high.
She said the economy had proven more robust than expected at the start of the year, giving companies more room to charge higher prices.
Official figures released on Thursday are expected to show that the economy continued to recover from recession in the three months to the end of June.
