Inflation is in the news again.
The government says pay rises cannot be afforded because they are inflationary.
Unsurprisingly, people want pay rises to compensate for inflation.
And as a matter of fact, the economy needs people to have pay rises if a recession is to be avoided. Latest data from consumer markets reports that consumer spending, unadjusted for inflation, was up 4.2% in November, but consumer prices were up 11.1%, meaning there is already a significant recession on the High Street.
And yet ministers are out yet again saying that people must not be allowed inflation-matching pay rises, whilst Labourt sits, silent as ever, on the issue.
It would seem as if very large numbers of people do not understand this really rather simple chart:
The data is for five years. In the first two there is no inflation. Wages and prices do not change.
In year three there is a big external shock. Prices increase by 10% in reaction. Wage rises are held down to 5% increases.
In years 4 and 5 there is no inflation and so wage rises are resisted: they stay at 105% of those before the shock.
The result is a continuing loss of well-being by those who were not allowed inflation-matching wage rises. They only have about 95.5% of the spending power they had before the external shock arose. The impact is to permanently reduce spending power in the economy in a way that is deflationary.
This is, of course, the government's intention. It wants to reduce inflation. But, the inflation was not caused by wage price increases. It was caused by an external shock that can do one of two things. The first is to permanently shift economic power out of the country, which requires a shift in the exchange rate or to permanently shift economic benefit from those on wages to those charging the new higher prices within the economy. Both are happening, but the latter is almost certainly significantly more marked than the former.
The result of the policy now being pursued by the government is threefold. By reducing spending power it reduces growth and virtually guarantees recession. Within that recessionary environment, it reinforces and increases inequality. Third, it provides no incentive to invest as markets are not there to encourage anyone to do so. Far from helping the economy, denying a pay rise harms it in that case.
And yet all our politicians are saying there is no chance that we can afford inflation-matching pay rises.
The truth is we cannot afford to not give inflation matching pay rises. It really is that simple, unless, of course, we want to trash the economy and increase inequality.
And will those inflation-matching pay rises then force prices up? The answer is no, because the increased profit margins out of which they can be paid already exist so long as recession is not allowed to bite first, reducing firms' profits for a quite different reason. And that is precisely why we need the pay rises now.
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Well, I can vouch for this in my public sector employed family – this will be a very Scrooge like Christmas. Our spending is down, no doubt about it.
My understanding is that wages and benefits in line with inflation are not actually inflationary. It is the rewards of the above inflation pay and bonuses of our CEOs and financial sector that are the problem, allied to the real elephant in the room – credit creation – where people are making money out of their money or creating fiat credit – that drives inflation and creates bubbles. So, it seems to me that it is OK to flood the economy with rent seeking money but wrong to have an economy with wages which match inflation.
And who does that policy benefit? And how does a lack of wages contribute to the need to use credit? They’ve got is all sown up.
The economy is definitely stacked against ordinary people making a living from their labour and it was before the oil shock. If anything, Putin has perversely helped reveal the paucity of thinking in this country.
Please send this to BBC r4 news. Today programme interviewed Lynch etc about the dreadful consequences of the strikes but they never address this question head on – as to whether ‘we’ can ‘afford’ it, and what would be the consequences of getting or not getting inflation matching rises.
The BBC (and other media) invariably blame strikers for the consequences of the strikes. As Professor Murphy says, in another context, they are not responsible: the Government is responsible for starving public services of the staff, funds and resources needed. The BBC is simply backing the government, not the people, while pretending to be “impartial”. It is anything but.
Why do people always say public services? Many of the strikes are not public services any more. They should be, but most of the railways are in private hands. 25% of the NHS has been privatised, including many ambulance services. Care workers are private companies now, on the whole. Royal Mail has been sold off to the private sector. University and college lecturers are private.
I wish this could be got over to the MSM.
They are public services because they serve the public. Allowing them to be privately owned has proved to be a predictable (and predicted) disaster, but it is time that they lived up to their function.
In which case why does the government always pretend that strikes over pay increases are nothing to do with them?
The government hides.
Is it not the case that though privatised they cannot set prices as they wish? In many case it’s not limited to privatised services.
When it comes to a dispute a privatised service can only reduce what capital investment there has been or reduce profit/dividends. They don’t invest in their human capital (yes I know it’s a crap term)
In other cases we could already see reliance on overtime backfiring before strikes. I noted the NHS spokesman said that a strike would mean the ambulance service was running as if it was a bank holiday – that means wet have all been put at risk every holiday for how long? An emergency service may need a different labour structure on a bank holiday (viewed nationally) but Illness and accidents don’t magically reduce: I’d expect 365×24 hour cover.
Bottom line – the services are collapsing through mismanagement and now it’s the staffs fault!
Just so you know there is a typo in the heading and on the y axis. Infaltion both times. Might be worth updating if you post this anywhere else.
Thanks
There is an interesting article in last Sunday’s Observer by Andrew Rawnsley in which he thinks that the government is deliberately picking a fight with the unions by refusing to take part in any negotiating settlements in the public sector in order to get public opinion to turn against workers. If he is right then we are in for a very dire winter indeed and either face increasing poverty or a militant uprising or both.
I think he may be right
I also agree with his conclusion, that this cannot work for the Tories
It is obvious to too many that this situation has been created by austerity
I have been somewhat annoyed by various politicians and media types saying that unions are going to ruin Christmas. Amongst other things 12 years of mis-management by this government has ruined many things, including Christmas. It doesn’t stop at mis-management either, deliberate acts of financial vandalism and maybe even some corruption. Its like repeatedly p*ssing into the corner of a room and then blaming the resultant stink on your guests.
Agreed
The latest round of union bashing is even more ridiculous. RMT has announced a further rail strike from 6pm on Christmas Eve to 27 December. Screams of ruining Christmas, people being interviewed saying how much this will destroy their Christmases. The rail network is shut down on 25 and 26 December. Very few services run after 6pm on Chistmas Eve. Engineering/maintenance work will seriously impact train services on 27 December to 2 January. But this is the RMT destroying Christmas?
A recent blog post from Michael Roberts on the alleged wage-price-spiral, which none other than the IMF have debunked: https://thenextrecession.wordpress.com/2022/11/20/the-wage-price-spiral-refuted/
Thanks
Fascinating to see empirical analysis over a number of years and countries to demonstrate that there is no such thing as a wage-price spiral at all – rather, wages tend to lag inflation, and then catch up but not overtake increases in prices. And there is no correlation – in the US at least – between inflation and unemployment.
Here is the IMF working paper. https://www.imf.org/en/Publications/WP/Issues/2022/11/11/Wage-Price-Spirals-What-is-the-Historical-Evidence-525073
“inflation and nominal wage growth tended to stabilize, leaving real wage growth broadly unchanged” “nominal wage growth normally stabilizes at levels that are consistent with observed inflation and labor market tightness.” “This mechanism did not appear to lead to persistent acceleration dynamics that can be characterized as a wage-price spiral.”
Yet another economic truism that turns out to be false, but which is deployed repeatedly for partisan ideological purposes.
Eye-opening to see the unashamed statements from central bankers and economists who want to increase interest rates to the point where they create unemployment to reduce the cost of labour: “Monetary policy must be tight enough to … create/preserve some slack in the labour market.”
Jeez, guys, what about these people who are laid off, and their families being forcing into penury. Sorry, their lives must be sacrificed on the market’s altar of fiscal prudence, to maintain returns to capital.
Many thanks
Missed that and will read now
I’m afraid those increased profit margins are mainly ending up in Texas and Doha these days and not in pockets taxable by the UK government
I am not wholly convinced of that
Even if that were true, whose fault is that?
I’ve just been following weownit at lunchtime. They give a list of links that people have given them. Today one of the links was to a series on BBC sounds by Tim Harford called Understand: The Economy, a series of 15 minute podcasts. It’s a bit worrying that all those on weownit now think that this is a good explanation. The first one said that we need 2% inflation so we don’t get deflation. We were also asked to think of the Bank of England as a greengrocer.
Do you have a link?
Thank
https://www.bbc.co.uk/sounds/play/p0df7gzl
Thanks
What appears to have been lost in the discussion above re the RMT dispute, and a point that Mick Lynch makes from time to time, is that the UK government has been prolonging the RMT strike since March by compensating the Rail franchise companies for loss of earnings on every day of strike action. It’s not the RMT members who are spoiling everyone’s Christmas plans but this completely out of control wanna be Thatcherite Tory mob in Westminster.