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Invoking the spectre of 1970s stagflation has long been a popular trope among investors and political economists alike. The basic tale - well known even to those who had not entered the labour force (or even been born) during that period - is of a tussle between labour and capital to avoid bearing the brunt of the oil price shock, resulting in a wage-price spiral.
The recent surge in inflation has stirred fears of something similar. The Federal Reserve responded last month by accelerating the pace of tightening, while the European Central Bank has laid out its path for interest rate hikes at its next two monetary policy meetings. The Bank of England has just reported that UK businesses expect average wage growth of 5.1 per cent over the next 12 months, with output price inflation expected to be 6.1 per cent.
Will wages rise?
Are central banks right to worry about a wage-price spiral? Our latest monthly Analyst Survey suggests it is a distinct possibility, with 79 per cent of FIL analysts saying they expect to see per capita wages rise over the next 12 months at the companies they cover. And as this week’s chart shows, such expectations are held by analysts covering all sectors of the economy. These findings represent on-the-ground evidence of what seems to have spooked central bankers in recent weeks.
Dig into the data and there are some regional disparities. More than half of the China-focused analysts expect wages to stay about the same at their companies, while those covering Japan are split 50-50 between no change and a moderate increase. It’s also interesting that when we asked the same question back in September, the sector with the highest proportion of analysts expecting wages would rise was consumer discretionary. While moderate wage increases remain the consensus expectation among analysts covering that sector, it has now fallen to the bottom of the pack. This is consistent with an environment in which US and UK consumer confidence indices are at their lowest levels on record, and in which Fed Chair Powell told Congress last month that recession is “certainly a possibility”.
So while the components of a wage-price spiral may appear to be in place, the operation to stop it is also already in full swing.
 Bank of England Monthly Decision Maker Panel data - June 2022