The labour market is at the heart of the Bank of England’s thinking on inflation and interest rates. There are some aspects of the current cost of living crisis that the Old Lady can do nothing about.
It can neither control energy prices nor ease bottlenecks in global supply chains. But it can send out a message to individuals and firms that it is serious about getting inflation back to around its 2 per cent target.
The Bank’s aim will be to imprint that expectation in the minds of unions and employees, so they do not try for exorbitant pay increases.
When the pandemic struck, most forecasters expected dole queues to lengthen. Instead, there has been something of a jobs miracle
Firms may also be less inclined to try to hike their prices if they believe the Bank is clamping down in earnest.
Thanks to decades of price stability, we have forgotten that inflation is one of the great economic evils. It corrodes living standards, eats away at savings.
For the UK, as an exporter of services and an importer of goods, it creates adverse terms of trade. One of the blights of the 1970s was industrial unrest and wage demands that created a self-fulfilling spiral.
When the pandemic struck, most forecasters expected dole queues to lengthen. Instead, there has been something of a jobs miracle, with unemployment incredibly low. This has not been accompanied by generous pay awards – yet.
It is an ominous sign, though, with a dash of black humour, that economists at the National Institute of Economic and Social Research have voted to go on strike over a pay offer of 2 per cent.
As they would well know, with inflation at 5.1 per cent, that is a pay cut in real terms. They are not alone. Average pay is not going up by enough to keep pace with the cost of living.
Possibly there is a lag in perception as workers outside the economic think-tanks may not yet have fully grasped the damage that is coming to their real incomes.
Rather than demanding bigger salaries, employees have seemed obsessed with lifestyle issues such as the right to work from home forever after.
But it’s only a matter of time, and staff are in a strong bargaining position to demand more. The balance of power in the workplace has shifted dramatically in favour of employees.
Businesses are already suffering from staff shortages and live in dread of ‘The Great Resignation’. One recruitment company estimates more than 9m people are looking for a new role this spring.
Combine that with older workers quitting during the pandemic and firms are under intense pressure to pay more to attract and keep good people.
All the more reason for the Bank to make very clear that it does not intend to let high inflation become embedded in the system.
This means that, barring a major shock, more interest rate rises are on the way on top of the rise from 0.1 per cent to 0.25 per cent last month. But let’s keep a sense of proportion: rates will remain very low and are simply being shunted out of emergency mode.
That is precisely what should happen as the economy recovers.
If the Lloyd’s of London insurance market decides to move out of its Lime Street headquarters it will be a sad day. The Lloyd’s building opened just after the Big Bang in 1986 swept away the cobwebs from the fusty old City.
Towering over nearby Leadenhall Market, it embodied the spirit of the 1980s in all its brash, exhilarating excess.
Its gleaming metal was a confident symbol of optimism and modernity.
As the City’s old-school jobbers and brokers were joined by a tide of American bankers, Richard Rogers’ masterpiece declared that the 300-year insurance market steeped in tradition was still a formidable presence.
As a young financial journalist I drank in the thrilling sight of it, teeming with underwriters, on my way in and out of the office each day.
The transparency of the architecture, with its ducts, pipes and lifts made visible, was not always mirrored in the workings of the market itself.
There was chicanery, scandal and ruinous losses for some members, who were known as ‘Names’.
They were well-to-do individuals who were personally liable down to their last cufflink or earring, but never expected that to happen. The market was reformed and bounced back, as it will post-pandemic.
But underwriting on Zoom is just not the same. Leaving the Lloyd’s building really will be the end of an era.
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