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  • Writer's pictureSteve Crowther

Thought for the Day: Inflation - wages

‘During the period of the Labour government from 2001 up to the financial crash in 2008, public sector pay moved well ahead of inflation. At that time, standards of living for these workers were increasing at a significant rate. The financial crisis and subsequent recession changed things so that from 2008 to 2010 the gap between the two narrowed. But even then, inflation was below pay increases except for a brief period in early 2009.

This all changed after the Conservative-Liberal Democrat coalition government came into office following the general election of May 2010. The new government embarked on a policy of austerity which involved severe spending cuts, and a freeze on public sector pay. As a result, pay fell well below the inflation rate. This situation continued right through to the 2015 election.’ (Paul Whiteley, Emeritus Professor of Government at the University of Essex)

Wage inflation

‘There is a reason investors are having flashbacks of the 1970s. The last time inflation rose as far and as fast as it has this year was in 1973….’ Here we go, here we go, here go…so continuing with Sarah Lochlund’s* economic insight ‘In the 1970s inflation became entrenched through a self-reinforcing “wage-price spiral” in which higher costs led to higher wage demands, which resulted in rising costs.’ Higher wages, higher production costs. I could easily slide into the economic mire exacerbated by the arrogance of the trade union barons and piss-poor management, but we are discussing inflation and, as Ms Lochlund quite rightly says: ‘Oil prices rose tenfold during the 1970s…’. For inflation, all of the above combined to produce the perfect storm.

*Principal and Senior investment consultant at Barnett Waddingham

Now it is a given that the current driver of the UK’s inflation is the high price of food and fuel and ordinary folk like me and you are struggling to make ends meet. Not surprisingly public sector workers have had enough and have taken strike action. This says, the government, risks stoking inflation.

‘Teachers were told their demands were “economically incoherent”, while Bank of England governor Andrew Bailey warned wage rises are “unsustainable” and said workers needed to show restraint in asking for more money. Just like austerity, or the ‘fiscal black hole’, it’s a slice of economic language that sounds smart, sort-of-convincing, and is used by people who know more than one tie knot – and so quickly forms a convenient narrative.’ Says Greg Barradale in an analysis for the Big Issue.

As the article goes on to say: ’Pay rises would not outstrip productivity improvements and are lower than existing pay rises in the private sector, meaning they’d contribute little to inflation.’ Hannah Slaughter, senior economist at the Resolution Foundation, goes further: ‘The actual problem the government is worried about is how to pay for higher pay settlements, balanced against needing to fill damaging staff shortages across the public sector.’

To balance this socially driven focus we turn to…the IMF: ‘Perhaps surprisingly, only a small minority of such [wage-price spiral] episodes were followed by sustained acceleration in wages and prices. Instead, inflation and nominal wage growth tended to stabilise, leaving real wage growth broadly unchanged.’ (November 2022) There is no proven correlation. We also need to bear in mind that public sector workforce makes up only 17 per cent of the total workforce, meaning that it has much less of an impact on the economy than the private sector.

The IMF went on to conclude that ‘…corporate profits are the biggest driver of inflation in Europe, while in the UK pay rises for the top 10% of earners have been driving price rises.’ This chimes with Christine Lagarde, the president of the European Central Bank, who said interest rates and inflation would remain high without firms accepting lower profits.

So where do we have to go from here. Well, Henry Parkes, who has written about economic policy for the Independent and New Statesman concludes:

‘A 10.5 per cent pay boost to restore real pay to 2019/20 levels – higher than the rises announced by the government last week - would add at most 0.14 percentage points to inflation if funded by borrowing. This undermines objections that higher public sector pay would cause significant demand-driven inflationary pressures, the IPPR report says. The effect would be smaller still, approaching zero, if the additional pay boost was financed from taxation.’

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