According to Catherine Mann, price increases that are easing to the Bank of England’s target shouldn’t “seduce” Britain.
Despite the fact that price increases have slowed to the Bank of England’s target level, the person in charge of setting interest rates at the central bank believes that the United Kingdom shouldn’t be “seduced” into thinking that the battle to control inflation is over.
Catherine Mann, a member of the Bank’s monetary policy committee, stated that the underlying pricing pressures in the economy continue to be strong. This demonstrated that the central bank needed to adopt a firm stance when it was charged with the responsibility of determining interest rates.
Mann, one of four policymakers who opposed this month’s drop in UK interest rates from 5.25% to 5%, stated that inflation in the services sector is still too high for comfort and that wages in the UK are increasing at a higher rate than the Bank’s predictions have indicated (according to Mann).
Official numbers that are set to be issued on Wednesday are expected to reveal that inflation increased to 2.3% in July, despite the fact that headline inflation remained stable at the Bank’s objective of 2% in May and June.
She stated, “Inflation has decreased, but if we look beneath the headline… we shouldn’t be seduced by headline inflation because of the role of energy and external aspects working through both directly energy and on the goods side.” She was referring to the fact that the economy has been experiencing negative growth.
In her appearance on the podcast of the Economics Show with Soumaya Keynes, which was released on Monday, Mann stated that although the inflation rate for commodities has decreased, the cost of services has been increasing at a rate of more than five percent per year. She believes that this is not compatible with maintaining headline inflation at a level that is sustainable at two percent.
According to Mann, she was concerned that there was an “upward ratchet” effect inside the services sector. This is because prices for services rarely decrease, in contrast to prices for products, which have in some instances returned to levels that were comparable to those before the pandemic.
As part of this process, she mentioned “the desire to maintain certain wage relationships,” alluding to the fact that an almost ten percent increase in the minimum wage in April has resulted in increased pressure on businesses to boost wages further up the pay scale from their current levels.
The month of April this year saw a significant number of new salary agreements, according to Mann. There will be pay negotiations next year, and these talks will be related to the negotiations that have already taken place. As a result, some individuals who were at the bottom received a significant boost, which is appropriate.
However, those who are above them did not, which indicates that they will do so the following year. This is due to the fact that it is essential to maintain relative earnings within a hierarchical structure, which are kind of in connection to one another.
Mann pointed out that manufacturers can also use the ratchet strategy to drive up prices, which may take a significant amount of time to “erode away.”
She made the following statement: “Companies take a look at their rivals, and their rivals tend to raise their prices a little bit.” Perhaps they are more effective than you. They make a slight increase in their prices, and their rivals also make an increase in their prices. On the negative side of things, we do not observe that behaviour.
According to Mann, there will be more persistent inflation shocks across the world, which will contribute to the cost of goods in the United Kingdom. A world that is more volatile would require central banks to maintain higher interest rates for a longer period of time in order to prevent another increase in inflation that would destroy the living standards of households.
She was of the opinion that the price of items that are either manufactured in war zones or are required to go through them would be subject to increased pressure as a result of greater shipping and transportation expenses.
Mann gave herself a score of seven when she was asked how cautious she would be about further interest rate decreases on a scale of one to ten. This is a decrease from the score of ten that she gave herself in the days when she was voting to hike levels above their most recent 16-year high.
In her statement, she stated that the economy had shown itself to be more robust than was anticipated earlier in the year, which provided businesses with the ability to charge greater prices.
In the three months leading up to the end of June, it is anticipated that the official numbers that will be revealed on Thursday will demonstrate that the economy has continued to recover from the recession.