Bank of England's most hawkish official: The labor market is “static” rather than loose, and inflation is deeply entrenched

The Zhitong Finance App learned that Bank of England interest rate setting official Catherine Mann said that the labor market is “static” rather than relaxed. At the same time, she warned that inflationary pressure is becoming entrenched.

Mann said on Tuesday that she is concerned about upcoming salary negotiations, at a time when the Bank of England expects rising fuel and energy costs to push inflation to “significantly above” 4% early next year.

Although Bank of England officials received some comfort from the weak labor market, believing it would help curb wage growth, Mann was not so relieved. She said that the UK is in an “environment of low recruitment and low layoffs.”

At a TS Lombard capital market event in London, she said, “I don't see this as a loose labor market; I think it's a bit static.” “Potential idleness comes from new entrants to the labor market, and I don't think they're good enough to actually transform it into a relaxed labor market.”

Mann is one of the most hawkish officials on the Monetary Policy Committee, and she has always advocated that interest rate hikes are needed to stop the energy shock from spreading to the wider economy. Although she was a member of the minority supporting an immediate rate hike last month, more officials have since suggested that the longer the conflict in the Middle East continues, the more difficult it is to avoid interest rate hikes.

The Bank of England is trying to determine whether the energy shock will trigger a second round of inflation, that is, companies are shifting higher costs and workers are trying to raise wages.

Mann said that despite the low level of job vacancies, she is still worried that the wage channel will keep inflation higher than the Bank of England's 2% target.

“They will begin negotiations when inflation is above 4% and is likely to have just experienced a bad rise in Ofgem energy prices,” she said. She was referring to quarterly increases in household gas and electricity bill caps in the UK.

She also pointed out the possibility that the minimum wage in the UK may rise sharply again, that companies may return it to consumers by raising prices, and said that another 40% of the labor force is “a bit like a trade union” in negotiations. She said that what workers are most concerned about is the cost of living.

She said that there is an “upward bias” in UK inflation, and delaying interest rate hikes will make the task of returning inflation to the target doubly difficult. If inflation ends up being more moderate than feared, policymakers can “turn around” at any time.

She warned that inflation was “deeply entrenched.”

Mann said that despite the energy shock, the real economy remains resilient. The main risk is that if households expect price increases to continue to be high, they may increase savings buffers to protect purchasing power.

Although Mann remains concerned about recent inflation, she pointed out that businesses are adapting to energy shocks, making the economy less exposed to further price spikes.

“They are actively investing in the transformation of energy production, such as from gas to wind and solar energy.” she said. “You'll also eventually be less exposed to energy shocks in the future, which is how the real economy changes its behavior in the face of energy fluctuations.”