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Pay rises could harm inflation, says MPC member

Businesses who compensate their workers for delayed pay rises could risk pushing up inflation, suggests the newest member of the Bank of England’s Monetary Policy Committee.

Delivering his first speech in the position, Ian McCafferty said: “There is a risk that, as the economy recovers, companies will feel obliged to reward their staff for their forbearance of recent years and compensate them for the recent squeeze in living standards with more generous pay increases.

“I hear this frequently when talking with companies, and from the tone of the conversations, it is not clear that such wage increases would be purely limited to increases in productivity, and might well be more “generous” to make up for the experience of recent years.

“What we can conclude is that the longer inflation remains elevated, and hence the greater the cumulative squeeze on real incomes, the greater the risk of such ‘generosity’.”

Mr McCafferty went on to say there was reason to believe that inflation may come back to the target only slowly over the next two years, and therefore influencing the 2013 and 2014 rounds of wage settlement.

Speaking to an audiences of financial experts and economists, he suggest that many fundamental relationships that define the UK economy are in a state of “flux.”

He added: “The ability of QE to easily stimulate additional demand in the current climate is less clear than for earlier episodes.

“That does not mean that the scope for monetary easing to boost demand has been exhausted. QE still works, but it is important to consider carefully the timing of further flows and to be mindful of when any further policy stimulus, which is not costless, would be likely to have the greatest impact.”

This was posted in Bdaily's Members' News section by Tom Keighley .