Speaking at the 2023 British Chambers of Commerce annual conference in London on 17 May, Bailey said UK inflation is being driven in part by the indirect effects of higher energy prices, as well as 'second-round effects' including wage growth and price setting.
With government-set goals to reduce inflation to 2%, down from the 10.1% recorded in March, he said: “the outlook for inflation further out is more uncertain and depends on the extent of persistence in wage and price setting.”
The rate of pay rises and price setting risks a wage-price spiral, i.e. when pay rises to meet inflation this results in higher prices, then higher prices raise wages in a self-reinforcing loop.
Pay and inflation in the UK:
HR Most Influential Thinker Frank Douglas, CEO of Caerus Executive, warned against a kneejerk reaction from employers as a result of Bailey’s concerns.
Speaking to HR magazine, he said: “The problem with that framing is it strongly implies the solution is to curtail wage increases – that is not the solution.”
Though rising energy prices were also offered as a cause for inflation, Douglas noted that the impact of mental ill health on the workforce and worsening skill gaps are also contributors.
“Healthcare, hospitality and construction had skill shortages prior to Brexit,” Douglas added. “The lack of free movement of labour has created an increase in demand with employers having to increase wages to attract workers, in the UK.”
The solution, Douglas said, is much more nuanced than stopping pay rises.
He added: “In short, the roadmap to addressing wage inflation is by more investment in mental health care, reversing the devastating impact of Brexit on the free flow of labour and controlling excess profits by companies, to name a few.
“CEOs and HR directors should not be looking at wages as the cause when it is an effect of previously mentioned issues.”
Though base pay rises for 2023 are expected to be the highest on the CIPD’s Labour Market Outlook record, the median pay rise in the private sector is expected to be 5%.
For the public sector, pay rises are expected to be just 2%.
For December 2022 to February 2023, Office for National Statistics data also showed average regular pay growth was 6.9% for the private sector and 5.3% for the public sector.
Fiona McKee, director of HR consultancy The HR Practice, therefore queried wage inflation in the UK.
Speaking to HR magazine, she said: “Whilst salary increases this year have been higher than previous years, we haven’t seen increases reaching anywhere near the rate of inflation of 10.1% (March 2023), therefore I’d question whether we are indeed in a wage-price spiral situation at all, with the average salary increase in regular pay being 6.6% (excluding bonuses).”
The Bank of England is aiming to bring the inflation rate down to around 5% by the end of the year.
If inflation continues in double figures, McKee said it will impact buying decisions and slow down sales pipelines which could mean redundancies are on the agenda for HR.
She added: “Coupled with increased wage bills, it’s likely this will result in businesses reviewing budgets and looking for opportunities to reduce headcount costs, a situation everyone wants to avoid.”
As inflation continues to impact the cost of living in the UK, McKee said employers may also see a loss in productivity as a result of employee money worries.
McKee said: “This can be a really difficult situation to address and the HR team would need to consider sourcing trusted external advice to reduce the risk of productivity loss."