Bank of England governor Andrew Bailey has praised companies giving higher pay rises to their lower paid staff after admitting that spiralling inflation is hitting the worst off in society the hardest.
Mr Bailey - on a two-day visit to the North of England that saw him meet businesses in the North East and North West - was speaking just ahead of the release of GDP figures which suggest the UK could be entering the longest recession in a century.
Official statisticians said the economy shrank by 0.2% between July and September, the largest quarterly fall since early 2021 when the UK went back into lockdown to combat the Covid-19 virus. Business groups said firms were seeing a drop in confidence, with one saying that “the outlook for the UK economy is now very bleak indeed”.
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Mr Bailey said he had received a range of views from businesses in the North, with some seeing improving conditions but many raising issues that included supply chain problems, labour shortages and cost increases. He said many companies were increasing wages in a bid to retain staff because of the difficulties of recruiting new workers.
And he added: “Quite a few businesses are saying to me that they are doing more to direct their pay rises to the lower paid, and I think that is sensible. I wouldn’t direct them to do that, it’s not for me to do that but when I talk to businesses, I can understand why they’re doing that.
“Inflation is bad for the least well-off generally and this inflation is particularly bad. The reason is that it’s concentrated on energy and food - these are the essentials of living. It’s notable that when you look at the consumption mix of different income groups, the lowest income group have a higher proportion of energy and food in their costs. That means this inflation is hitting them harder relatively speaking.
“It’s not for me to preach but when employers say ‘that’s what we’re doing’, I say: ‘Yes, I completely understand.’”
The Bank of England last week published a forecast that said the UK might be headed for an eight-quarter recession - the longest consecutive recession since reliable records began in the 1920s. At the time, it raised interest rates to 3% but warned further rises were likely.
In Newcastle, Mr Bailey said that inflation was “way above where we want it to be” and that efforts under control were likely to take between 18 months and two years. He repeated that more increases to interest rates were likely in the coming months but said he was hopeful that inflation would peak over the winter and fall from its current rate of 10.1% next year.
This morning, figures from the Office for National Statistics (ONS), showed that the country’s gross domestic product (GDP) had fallen by 0.6% in September, in part due to the Queen’s funeral. The September figure was worse than expected, with analysts having forecast a 0.5% drop.
Ahead of a widely-anticipated fiscal statement next week Chancellor Jeremy Hunt said: “We are not immune from the global challenge of high inflation and slow growth largely driven by Putin’s illegal war in Ukraine and his weaponisation of gas supplies. I am under no illusion that there is a tough road ahead - one which will require extremely difficult decisions to restore confidence and economic stability.
“But to achieve long-term sustainable growth, we need to grip inflation, balance the books and get debt falling. There is no other way.”
But Shadow Chancellor Rachel Reeves said the latest GDP figures were “extremely worrying” and the Federation of Small Businesses said that “at a time when confidence is deteriorating in both consumers and businesses, the outlook for the UK economy is now very bleak indeed.”
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