Bank of England rate-setter Catherine Mann said the labor market is “static” rather than loose as she warned inflationary pressures are becoming embedded.
Mann said on Tuesday she is worried about upcoming wage settlements at a time when the BOE expects rising fuel and energy costs to push inflation “notably” above 4% early next year.
While BOE officials have taken some comfort from a tepid labor market, arguing it is helping to contain wage growth, Mann is less reassured. The UK is in a “low-hire, low-fire environment,” she said.
“I do not see this as a slack labor market; I see this as a bit static,” she said at a TS Lombard capital markets event in London. “The potential slack are the new entrants to the labor market, and I don’t think they’re enough to actually translate this into a slack labor market.”
Mann, who is one of the most hawkish officials on the Monetary Policy Committee, has argued that rate hikes are needed to stop the energy shock fanning out into the wider economy. While she was in the minority backing an immediate rate rise last month, more officials have since signaled a hike will be harder to avoid the longer the Middle Eastern conflict goes on.
The UK central bank is trying to determine whether the energy shock will cause second-round inflation effects, as firms pass on higher costs and workers try to bid up wages.
Mann signaled she remains worried about the wages channel keeping inflation above the BOE’s 2% target despite low levels of job vacancies.
“They’re going to start negotiating at a time when inflation is above 4%, when they’ve probably had a nasty Ofgem energy price increase,” she said, referring to the quarterly increases in the UK’s household gas and electricity bills cap.
She also pointed to the possibility of another hefty increase in Britain’s minimum wage, which firms could pass back to consumers through higher prices, and said another 40% of the workforce negotiate “somewhat like unions.” Workers’ main concern is the cost of living, she said.
There is an “upward bias” to inflation in the UK and delaying raising rates makes the job of bringing inflation back to target doubly hard, she said. Policymakers can always “pivot” if inflation turns out to be more benign than feared.
Inflation has become “embedded,” she warned.
The real economy remains resilient despite the energy shock, Mann said, with the main risk being that households could increase savings buffers to protect their purchasing power if they expect price growth to remain elevated.
While Mann remains concerned about inflation in the near-term, she pointed to firms adapting to energy shocks and making the economy less exposed to further price surges.
“They are actively investing in a change in energy generation from, say, gas to wind and solar,” she said. “You also end up being less exposed to the energy shock volatility going forward, so that is how the real side is changing its behavior in the face of energy energy volatility.”