Our generation has not really had much experience with either inflation or wage growth. In the 1990s, salary negotiations used to be an annual brawl every manager dreaded. A decade and a half of zero interest rates and sub-par growth rendered those meetings a mundane affair.
However, labour shortages, a result of vast changes in the skills market and, yes, Brexit, as well as persistent post-pandemic inflation have led workers to work up the courage and ask for more money.
By July 2023, the annual rise in UK wages was a staggering 7.8 per cent – the biggest increase in more than 20 years.
Additionally, the tight housing market generates yet more inflation. While house prices are down, rents remain very high. UK rental prices are up 5.9 per cent since last year – the highest since the survey began in 2006.
Thus, the forces that prompt higher inflation are mostly there:
- geopolitical disturbances and tectonic shifts;
- labour market dynamics;
- housing pressures; and
- consumer savings.
So why did the BoE stop hiking rates?
While encouraging, we must not read too much into the BoE’s decision to skip a hike. The UK central bank may have paused for one session, but they have not indicated that interest rates have peaked.
The central banker's line of thinking today is that, if interest rates remain at a high level for some time, they will continue to squeeze demand.
Recent data suggests that companies are now losing pricing power. This means that they will have to eventually say no to further wage hikes, in order to protect their margins and the inflation cycle will start to unravel.
But the truth of the matter is that, even then, we still do not know how and when inflation will recede.
At the time of writing, Saudi Arabia and Russia, emboldened by the production limitations of US shale oil producers, are testing the tenacity of oil prices around the $90 (£74) level – 35 per cent higher than in June.
This could start a whole new cycle of supply-side inflation, which would then turn into demand-side inflation.
In the words of writer Kurt Vonnegut Jr, “so it goes”.
George Lagarias is chief economist at Mazars Wealth Management
