Economists Suggest Minimum Wage Increase Could Potentially Sustain High Inflation Rates
Inflation has been a concern for the Bank of England (BoE) in recent years, with the current rate of 3.4 percent still above the target of 2 percent. However, economists have warned that a proposed 10 percent rise in the minimum wage could further complicate efforts to reduce inflation and delay the BoE’s plans to lower interest rates.
According to economist Ashley Webb from consultancy firm Capital Economics, there is a fear that the minimum wage increase could contribute to higher wage growth and inflation. This concern is shared by the BoE’s Monetary Policy Committee (MPC), which wants to see wage growth cooling before considering a reduction in interest rates from the current rate of 5.25 percent.
Chief Economic Adviser Martin Beck from the EY Item Club, an economic forecasting group, believes that the MPC may exercise caution in bringing rates down due to the potential impact of the minimum wage increase on broader pay growth. He suggests that assessing the effect of this rise on wages is another reason for inaction at the moment.
However, economists from Morgan Stanley argue that the minimum wage increase is not a significant factor as it only affects around 4.9 percent of the workforce. They believe that other factors such as cuts to national insurance and slower inflation could have a positive impact on retailers.
In November, Chancellor of the Exchequer Jeremy Hunt announced that the living wage, which applies to those aged 21 and over, would rise by 9.8 percent to £11.44 per hour from April 1. This increase will affect nearly 3 million workers in the UK. The minimum wage for those aged 18 to 20 has also increased, along with rates for under-18s and apprentices.
While inflation peaked at 11.1 percent in October 2022, it has gradually decreased over the past year. By March, it had fallen to 3.4 percent, still higher than the BoE’s target but showing positive progress. Hunt predicts that inflation will reach the target of 2 percent in the coming months.
The main driver of this decrease in inflation has been food prices, which have eased significantly. Hunt sees this as a positive sign for the economy and believes it sets the stage for better economic conditions, allowing for further progress in boosting growth and reducing national insurance contributions.
Despite these positive indicators, the BoE decided to keep interest rates unchanged at 5.25 percent in March. While Governor Andrew Bailey acknowledged the encouraging signs of decreasing inflation, he emphasized the need to ensure that inflation falls back to the 2 percent target and remains there. He expressed optimism about the progress made but clarified that interest rates cannot be cut yet.
The BoE uses interest rates as a tool to control inflation. When rates are raised, less money is spent, leading to a slowdown in price rises and a decrease in inflation.
Overall, economists are divided on the potential impact of the minimum wage increase on inflation rates. While some believe it could contribute to higher wage growth and inflation, others argue that it is not a significant factor. The BoE remains cautious and wants to see further evidence of cooling wage growth before considering a reduction in interest rates. With inflation gradually decreasing and positive signs of economic improvement, it remains to be seen how these factors will ultimately shape future monetary policy decisions.
[Reference: PA Media]
