Treasury inflation warning on public sector pay

The submission says “inflation could become more durable if people come to expect high inflation to continue, for example if workers demand larger wage increases to maintain their purchasing power”. It specifically argued that high public sector settlements will encourage similar in the private sector: “If public sector pay increases were to exacerbate temporary inflationary pressure, for instance through spilling over into higher wage demands across the economy or contributing to higher inflation expectations, then these short-term pressures would become more sustained”. That would, in turn, harm growth, exacerbate cost of living pressures and require higher interest rates, the document argues.

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