Bank of England Governor Andrew Bailey said that Britain is now witnessing a spiral in wage prices, despite interest rates having risen 12 times in a row.
Indirect effects of high energy prices
“Some of the rise in core inflation reflects the indirect effects of higher energy prices,” Bailey said in a speech, “but it also reflects the effects of a second round of external shocks that affect the state of the internal economy,” according to CNBC Arabia.
He added that with inflation slowing, the effects of this second round are unlikely to disappear as quickly as they appeared.
Higher wages and higher inflation
This situation threatens to create a wage spiral, a theory that says that workers bargain for higher wages as inflation rises, which leads to increased demand and prompts companies to raise prices to compensate for the exorbitant expenditures, which in turn leaves workers needing higher wages to afford the costs of goods and services, thus causing It leads to the persistence of so-called “second round effects”.
Decrease in the number of vacancies
Bailey said the slackening of the labor market, as the number of vacancies begins to decline, is happening more slowly than the BoE had previously predicted.
UK inflation slowed slightly in March to 10.1%, but remains at double-digit levels of concern for the country’s monetary policy makers.
The Bank of England decides to raise interest rates
On Thursday, May 11, the Bank of England decided to raise interest rates by a quarter of a percentage point, after nine consecutive months of double-digit inflation.
interest rate in England
The Monetary Policy Committee raised interest rates to 4.5%, the highest level since October 2008.
Interest rate setters are trying to bring down inflation, which has remained in double digits since August last year.
The CPI currently stands at 10.1%, more than five times the Bank of England’s inflation target of 2%.
The bank’s Monetary Policy Committee said there will be no recession this year, and raised the bank’s economic growth forecasts by more than any previous report.
Dramatic change in interest rates
Analysts said a dramatic change occurred just a few months ago, when the committee was forecasting the longest-running recession in recent British history. However, it still leads only to relatively lackluster economic growth this year and next.
While noting that interest rates may now be peaking, the bank also said it was surprised by the rate at which food prices are rising, meaning that broader inflation will be stickier this year and next.
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