Boris Johnson warns of ‘wage-price spiral’ if workers demand higher pay

Boris Johnson has raised the spectre of a 1970s-style “wage-price spiral” that could force the Bank of England to push up interest rates dramatically, if workers demand to be compensated for rocketing prices.

The prime minister vowed to tackle low growth and the cost of living crisis but said the government would put a new focus on the cost of housing, including extending the right to buy and a comprehensive overview of mortgage products aiming to radically increase the number of 95% mortgages on offer.

As rail workers prepare to go on strike later this month, and with inflation running at 9%, Johnson claimed that if wages continued to chase prices upwards it could unleash an economic crisis.

“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 said, speaking at a college in Blackpool.

In a wide-ranging speech about the economy, the prime minister acknowledged that the UK would be “steering into the wind” in the coming months, as he blamed “global pressures”, including the war in Ukraine, for soaring inflation and weak GDP growth.

The prime minister said the government should reject what he called the “Covid mindset” that more state spending was the answer to every problem, and instead focus on cutting regulation to unleash growth.

He pointed to the impact of the Russian invasion in Ukraine as he said the cost of living crisis was likely to continue.

“Everyone can see and feel the impact on household budgets: the increases in the cost of food, the spooling digits on the petrol pumps, energy bills growing seemingly ever larger,” the prime minister said.

“The price of oil and gas looks likely to remain high and the same goes for grain and feed and fertiliser.”

He said there was no easy way out, as “I do not believe there is a quick fix in Ukraine”, but added: “We’ll get through it, just as we got through the far greater challenge of Covid and the colossal fall in output that that entailed.”

He highlighted the direct support payments to households recently announced by the chancellor, promising the government would “back the British people for as long as it takes”.

Johnson said the government would announce several more measures aimed at cutting costs in the coming weeks, from making it easier to become a childminder, to cutting tariffs on imported food.

The Organisation for Economic Co-operation and Development (OECD) thinktank forecast this week that the UK economy would grind to a halt next year, making it the weakest in the G20 aside from Russia, while inflation would remain above 7%.

Johnson was speaking as the average cost of filling a typical family car with petrol exceeded £100 for the first time, on what was labelled a “truly dark day” for drivers.

The RAC is calling for the government to step in to cut fuel duty further or temporarily reduce VAT to help drivers, but retailers have been accused of profiteering and not passing on the 5p cut to fuel duty introduced by the chancellor, Rishi Sunak, in his spring statement in March.

The prime minister’s speech in Blackpool was billed as a reset for his premiership, setting out policies to tackle the housing crisis and cost of living, after surviving a bruising no-confidence vote in his leadership earlier in the week.

Johnson’s flagship announcement was that lower-paid workers would be allowed to use housing benefits to make mortgage payments, as well as extending right to buy for housing association tenants – which he termed turning “benefits to bricks”.

“Just as no generation should be locked out of homeownership because of when they were born, so nobody should be barred from that same dream simply because of where they live now,” he said.

Johnson said an independent review would report by the autumn with the aim of widening access to low-cost, low-deposit mortgages, aimed at opening the market to renters paying hundreds more a month in private rent than they would in mortgage payments.

“We have a ludicrous situation whereby plenty of younger people could afford to make monthly mortgage payments – they’re earning enough to cover astronomical rent bills – but the ever-spiralling price of a house or flat has so inflated deposit requirements that saving even just 10% is a wholly unrealistic proposition for them,” Johnson said. “First-time buyers are trying to hit a continually moving target.”

He said the review “will look at how we can give our nation of aspiring homeowners better access to low-deposit mortgages”.

The plans have been greeted with trepidation by some housing campaigners, with warnings that the right to buy reforms would deplete supply and that allowing those on benefits to use them for mortgage payments would help only a small number.

Polly Neate, the chief executive of housing charity Shelter, said the right to buy plans were “baffling, unworkable, and a dangerous gimmick”.

She said: “Hatching reckless plans to extend right to buy will put our rapidly shrinking supply of social homes at even greater risk. If these plans progress we will remain stuck in the same destructive cycle of selling off and knocking down thousands more social homes than get built each year.”

Lindsay Judge, research director at the Resolution Foundation, said the changes to mortgages for those on benefits was likely to have limited impact. “The number of people affected is likely to be small given that the deposit is the main barrier to homeownership.

“More than four in five families on means-tested benefits have no savings at all and high cost of living pressures means a second change that allows benefit recipients to save into certain savings accounts without seeing their benefits cut is unlikely to lead to a surge in savings.”

Comments are closed.