Bank of England Governor says income squeeze is necessary

Governor of the Bank of England Mervyn King has said that a “squeeze” on take-home pay is necessary this year, and urged pay restraint in the face of rising inflation.

Speaking on Monday, King said rises in inflation are unavoidable as the UK economy faces higher energy and commodity prices in coming months.

He predicted that inflation is likely to rise to between 4% and 5% during 2011, before falling back sharply in 2012.

Despite this, and what King described as a 12% squeeze on take-home pay, he urged pay restraint, and suggested that the Bank of England would consider raising interest rates to thwart attempts to raise wages to keep up with price rises. He said: “Further rises in world commodity and energy prices cannot be ruled out.

“Attempts to resist their implications for real take-home pay by pushing up wages would require a response [from the Bank of England’s Monetary Policy Committee].”

He also said that, as well as rising energy and commodity prices, higher import prices and the rise in VAT had combined to bring about the current high inflation rate.

King estimated that these factors were contributing the equivalent of three percentage points to the inflation rate each year for four years. However, he considered all of these factors necessary as part of the UK economy’s rebalancing away from domestic spending towards more exports.

King’s warning contrasts with research which suggests that some pay rises are in the pipeline this year – with recent XpertHR data showing that employers are likely to offer salary rises in order to reward employees who have experienced two years of freezes.

XpertHR pay and benefits editor, Sheila Attwood, said: “Most employees will not be expecting, or receiving, a bumper pay rise in 2011. However, having endured pay freezes for the past two years, neither will they be happy to see their salaries stall again. We expect to see pay rises of around 2.5% to 3% in 2011, which is still some way below RPI inflation of 4.8%.”

Visit XpertHR to access further data and information on pay and benefits.

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