Bank of England: Wages not keeping up with rising inflation

Continued rising inflation means people are seeing a cut in real wages. And although the Bank of England sees things improving, it’s premised on a “smooth Brexit”.

The Bank of England published its latest inflation report today and announced that it would not be raising interest rates in the near future. Governor Mark Carney also warned that Brexit was already having an effect with rising inflation and wage growth slowing meaning a cut in real-terms pay. He said “this is going to be a more challenging time for households” and that “wages won’t keep up with prices”.

On a more positive note, Carney said that we should start to see the situation improve next year as inflation slows. But there’s a big caveat to that. And it’s that the next government is able to agree a “smooth Brexit”. He explained that this is based on the UK getting a good trade deal as well as agreeing a transition period to avoid disruption. In another report published today, the significance of the EU as a trading partner was certainly highlighted. The Office for National Statistics (ONS) report showed it was the UK’s biggest trading partner by far with exports to the EU rising in the last quarter whilst exports to non-EU countries actually falling. There was also less reason to be optimistic as the report showed a widening gap in the UK’s trade deficit.

More signs UK economy is slowing as trade deficit grows

And whilst Theresa May’s government has said they wanted a “bold, comprehensive trade agreement”, it is her government’s red lines on free movement and jurisdiction of the European Court of Justice that make achieving one very unlikely.

At a press conference, the Bank of England governor was asked if they had prepared an alternative forecast in the event of a “turbulent Brexit” but Carney responded that they hadn’t. The Bank of England is clearly pinning its hopes on a “smooth Brexit”. Unfortunately for all of us, that may be rather optimistic. In a Sky News report, it notes the Bank is in election purdah will have wanted to make the report as “uncontroversial as possible”. On the surface, it certainly seems so but the caveat of a “smooth Brexit” is a rather big one.

Highlighting that there were limitations to what the Bank could do, the report said “monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years”.

It added that any attempt to offset rising inflation would likely mean a trade-off resulting in higher unemployment and “even weaker income growth”.

This tweet from the Financial Times’ Sarah O’Conner sums up the gist of what the Bank of England are saying:

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