Sushil Wadhwani, CIO, PGIM Wadhwani has emphasised the critical need for the Bank of England (BoE) to address the growing possibility of embedded inflation. Wadhwani’s remarks come in the wake of three consecutive months of higher-than-anticipated Consumer Price Index (CPI) inflation and a surge in wage growth, raising concerns of a potential wage-price spiral reminiscent of the 1970s. While urging the BoE to take appropriate measures, Wadhwani advises against an overly aggressive approach, cautioning against a fully-blown wage-price spiral scenario.
Recognising the detrimental impact of inflation on sustainable growth, Wadhwani advocates for continued monetary tightening as the prescribed medicine to curb inflationary pressures. However, he advises against undue haste or panic, noting that the system already witnessed significant tightening and that mortgage rates for many individuals are yet to rise.
Sushil Wadhwani comments: “Significant upside surprises in both price and wage inflation indicate that inflation may now be embedded. It is crucial that we avoid overreaction and panic, considering the existing tightening in the system. I would resist the siren calls for a 50 basis points rate hike by the Bank of England. I believe they should proceed judiciously.”
“Aligning fiscal policy with monetary policy is of utmost importance to support the Bank of England’s efforts and prevent the situation from worsening. Hasty decisions on tax cuts should be avoided, and it would be prudent to defer them until spring next year, with hopes of witnessing signs of inflation abatement.”
“Attacks on independent economic institutions have dire consequences, leading to an increase in interest rates. Had these persisted, then two year mortgage rates might have been significantly higher than the current level of approximately 6 percent”
Commenting on the impact of recent events: “The Bank of England has faced considerable challenges due to the Ukraine crisis and its impact on commodity prices. However, there are lessons to be learned all round as they reflect on this experience. The dislodging of inflation expectations leading to a potential recession wasn’t supposed to happen, and should serve as a valuable lesson for all stakeholders involved.”
Sushil also highlights the key distinctions between the United Kingdom and the United States, noting that the UK faces a more substantial energy price shock due to its status as a net energy importer, warranting a unique response. Moreover, unlike the US, the UK has witnessed an acceleration in wage growth alongside persistently high CPI inflation, which remains at over eight and a half percent. In contrast, the US has experienced a meaningful deceleration in wage growth, standing at four and a quarter percent compared to the previous year.
This is based on Sushil Wadhwani’s outlook on interest rates and inflation ahead of the Bank of England next announcement on interest rates. For more information, or to arrange an interview with Sushil, please contact PQS@Montfort.london
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