Wage-price spiral | Is Boris Johnson right to say workers need to accept pay cuts?

Boris Johnson has warned that workers will have to accept real-terms wage cuts if the UK is going to avoid ‘70s-style “stagflation” and soaring interest rates.

This represents a startling U-turn on comments made earlier this year, when he repudiated the Bank of England governor Andrew Bailey’s suggestion that British workers should accept wage restraint in order to avoid spiralling inflation. In response to that, the Prime Minister’s official spokesman said: “It’s not something that the Prime Minister is calling for. We obviously want a high-growth economy and we want people’s wages to increase,” City AM reported.

However, in his most recent speech – designed to ‘reset’ his premiership after winning the vote of no confidence on 6th June - the Prime Minister said the opposite. “If wages continually chase the increase in prices, then we risk a wage-price spiral such as this country experienced in the 1970s. Stagflation – that is inflation combined with stagnant economic growth,” he said.

“When a wage-price spiral begins, there is only one cure and that is to slam the brakes on rising prices with higher interest rates,” he continued. “That has an immediate impact on mortgages and rents. It puts up the cost of borrowing for business, it is bad for investment and growth, it is bad for jobs – it is bad for everyone.”