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Treasury issues warning of 1970s-style wage-price spiral

Chief Secretary Simon Clarke said pay claims to match inflation will simply push prices even higher.

17 June 2022

The Government has issued a fresh warning to workers that they cannot expect pay rises to keep up with the soaring cost of living.

Treasury chief secretary Simon Clarke said pay demands which seek to match the rate of inflation risked creating a 1970s-style wage-price spiral, pushing prices in the shops even higher.

His intervention came after the Bank of England forecast inflation was set to hit 11% in the autumn as it hiked interest rates to 1.25% – the fifth successive rise.

Mr Clarke said it was essential to prevent expectations of wage rises matching increasing prices becoming “baked in”, driving inflationary pressures.

“There isn’t an automaticity between inflation and pay settlements and we need to be very careful to avoid fuelling an inflationary spiral in a way which actually is to everyone’s detriment if we allow it to run away from us,” he told the BBC.

“That is what the governments of the 1970s failed to address.

“If we end up in a world where we are saying all settlements try to match inflation or even exceed it then we are in a position where we are actually creating the conditions whereby those expectations become baked in, become self-fulfilling.

“That is the inflationary risk.”

On Thursday, Communities Secretary Michael Gove warned the economy faced a “painful” adjustment as the Government and the Bank try to “squeeze” inflation out of the system.

Mr Clarke made clear that public sector pay rises would need to be held in check and that ministers would be looking closely at the recommendations of the pay review bodies over the coming weeks.

Communities Secretary Michael Gove
Communities Secretary Michael Gove has said the economy faces a ‘painful’ adjustment (Oli Scarff/PA)

“We are very far away from a world here of a public sector pay freeze. That is not what we are doing now,” he said.

“We are looking very carefully at what the pay review bodies are sending through to us. The early signs are encouraging. There is sensible progress being made.

“We will have to wait for the full readout of those negotiations but when that concludes in a few weeks time I think a lot of workforces will see they are getting good pay offers and that is to be welcomed.”

His warning came as 40,000 rail workers were expected to bring much of the country to a halt with a series of one-day strikes in support of a wage increase to keep up with prices.

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