Inflation is the consequence of rising real prices of good and services relative to the value of the goods and services provided. In other words, if the price of what we buy goes up by 10% but what we buy is unchanged then we have 10% inflation.
We are suffering inflation now. It is widely recognised that there have been three reasons for this inflation.
The first was supply chain disruption following the Covid lockdowns that created shortages in the supply of some products, from gas to semi-conductors. With some people having savings from the Covid period and a desire to spend them this caused some selective short term price hikes in late 2021. This influence on prices has now gone.
Then there was the war in Ukraine. It was believed that this would create supply shortages for oil, gas, essential foodstuffs and fertiliser. As a result the financial commodity markets massively increased the cost of these products. As it turned out there were no such shortages. There need have been no such price rises, but those who made them liked the profits and by no means all those prices have fallen back as yet, especially in consumer markets.
Third, there is Brexit, which has made some foodstuffs much harder to import into the UK even though there are no actual shortages, and this has increased prices.
What has not caused inflation are quantitative easing, excess government spending or wage increases. In fact, government spending compared to need is too low and wages in general are well behind inflation.
So, the causes of inflation have nothing to do with pay.
This, though leads to the question ‘who gains from inflation?' After all, if prices rise by 10% and wages by only 6%, who gets the rest?
Some, very obviously, covers increased costs. That's a fact. But those costs have only increased by 10% on average. So, any employer who has managed to increase prices by 10% has covered their non-wage cost increases pound for pound, but if they have only paid a 6% pay rise they have increased their profit by roughly 4% of their payroll cost. In other words, it is certain that right now profits are being made by keeping pay rises down.
What that means though is that part of the inflation we are suffering is the result of a profit spiral.
At the same time there is a downward wage spiral.
But none of this affects the NHS, or teachers, or many other public servants because there is no charge for the services they supply. So their pay increases cannot directly fuel inflation.
They could only indirectly fuel inflation. But that would only be true if public sector employees got above average pay rises that pushed pay claims in the private sector upward.
That is not what is happening. Public sector pay deals that have been agreed are lower than private sector deals, on average. So there is no spillover from public sector pay deals into private sector pay.
So, in other words, nothing about likely public sector pay deals is going to impact inflation.
That's not surprising. That's because inflation is going to tumble this year come what may, although prices will still go up. That's because inflation measures relative and not actual prices. Now we are more than a year after the start of war in Ukraine the price shock it created will automatically work through the inflation calculations this year meaning that they will be very much smaller. 3% inflation is possible by the year end. Next year it may well go negative and prices might fall, although not by very much. That is going to happen because the arithmetic makes that outcome nigh on inevitable, unless there is another worldwide shock like another war.
So, not only can public sector pay not increase inflation, inflation will fall whatever happens to public sector pay. Those are as close to facts as can be said of any economic forecast.
The government's claim that it cannot afford public sector pay rises because they are inflationary is in that case a lie. It is not possible to make that claim. But they do. And that is why the public sector workers seeking to both be fairly paid and to secure the future of our public services deserve our support.
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I would look at the question from a different angle.
Fact: There is inflation now, and public sector pay has in general, not increased over the same time (MP pay being the exception)
Conclusion: Public sector pay rises have not caused inflation.
We don’t even need to speculate what has caused inflation over the last year or so, the data is available. The Consumer price inflation, UK: October 2022 shows us, see Figure 6. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/october2022
Pay rises are not included. Pay rises do not cause inflation.
Fair comment
What worries me Richard is that the monopolistic nature of key industries in the UK will enable them to use their pricing power to keep increasing prices beyond any necessity caused by Covid, Ukraine or Brexit.
Over the years we have been conditioned to believe that it is normal that Oil companies never compete on price and the Privatise utilities are even worse, hiding their monopolistic practises behind a wall of special “deals” wrapped in incomprehensibly worded contracts.
The lack of choice in Banking is even worse. As you suggested in an earlier blog about bringing back the Giro Bank, a trustworthy, secure retail only bank would probably clean-up, but such a thing is anathema to our current banking industry.
At heart I’m just a working class working stiff who comes here to keep up with reality because my life has been just one long period of cognitive dissonance over what I’m told about life and the reality.
So, I’ll stick my neck out basing my views on what I know about MMT and tax.
Public pay rises cannot cause inflation because the resulting pay would be taxed (plus NI) contributions, so at the time the pay is created, its economic over-heating potential is also under some sort of control or curbed by government who pay the wages.
This is in total contrast to other sectors or actors of the economy who pay less tax as proportion of their income which is much higher than any public servant will ever be on such as the wealthy and corporations who can also find ways to avoid and evade tax or control markets.
The public sector can never be an engine of inflation as far as wages go, but it’s investment behaviour in certain markets might have inflationary effects.
So – I’ve stuck me ‘ead above the parapet, I’ll put me tin helmet on and a flak jacket and you can all fire when ready.
Warren Mosler flatly disagrees with you
But he is wrong and you are right
There will be much more on this soon – rather more than 10,000 words written on this in the last three days and a lot of thinking time was required
Well in that case I am still in the fight to go further.
If the state can be the last lender of resort to incompetent private bankers and intervene by creating liquidity, why can the state not intervene in markets that are inflating prices on behalf of the good of society as a whole?
That is bit that is missing I think from the discussion.
Inflation is treated as a bogeyman but also a ‘hands off problem’ with no answers or remedies worth speaking of except (wrongly) the cost of labour as a factor and things ‘beyond our control’ as if inflation was not driven by market actors making pricing decisions but just sort of happened as if by magic.
This is pure reductionism in my view to leave us so limited in our responses to economic problems.
Thank you.
You keep your head Pilgrim and by Kipling’s criteria are a ‘good bloke’.
If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise:
When Richard says the government claim is a lie, my thought was ‘perhaps they are slaves to neo-liberalism and think they must do this’. If someone says something which is wrong but believed , then it is not technically a lie. BUT they do blame other people, they are not trustworthy, they have given way to hatred and talk as if they know when they don’t.
AND I am coming to think some of them do realise what is true and are lying.
Between your forensic case and Mr Tresman’s excellent observation you present a powerful argument. The problem doesn’t end there for the Conservatives. The failure on their policy on inflation has been so egregious, it now cannot be avoided at any level. In traditional profligate way the badly mismanaged use of resources to prop up a failed neoliberal ideology through Sunakian artisanship; Neoliberilm’s modern mechanic: is that in thirteen years of pursuing policies of Austerity, Brexit and non-Government intervention in the economy the fauilure of policy can no longer be fudged or ignored: GDP (the Government’s own preferred measure of economic success) is flatlining and the economy teeters on the edge of recession, is moving towards an endemic failure to grow on any measure, continues to show no signs of productivity improvements; without any prospect of success, in any plausible future based on neoliberal policies.
I do not care for the title of the Blog however, because while it is true that in this set of circumstances it applies, I believe it allows neoliberal critics to beg the question and answer another question; can pay rises in principle cause inflation? Neoliberals do not care about anything but leading public opinion wherever they wish to go.
More generally, I agree with the thrust of your approach to Bennett in the interview on neoliberal economics (do not allow them to dump the problem they have on Truss; they merely want to load the failure of their so-called ‘free market’ monopoly capitalism on the shoulders of the easiest dud they have to hand). It is time to attack neoliberalism. The weakness is where they believe they are strong – they have failed on their own measure of GDP for thirteen years; thirteen years following a financial catastrophe that is the responsibility solely of neoliberal econimic ideology un controlled, and unhinged. It is time the Conservatives departed; unceremoniously thrown out, as waste – redundant trash.
Well, I can see at least two ways in which public sector pay rises could in principle increase inflation.
First, increases in public sector pay could in principle fuel increased demand for good and services (or at least increase consumer competition for them) so allowing suppliers to charge more. But inflation in recent years has very much been driven by constraints on the supply side (supply chains, energy, Ukraine) not pressure from the demand side. Loose money supply through QE has led to some asset price inflation – shares, houses, etc – but not prices in the shops.
Second, increases in public sector pay ahead of the private sector could trigger demands for increased pay in the private sector, which would have a more direct impact on supplier costs and so prices. But public sector pay has lagged behind public sector for some time, the private sector is larger than the public sector, and we have a shortage of workers in the private sector anyway, so private sector workers have been making demands for and achieving more pay on their own without regard to what is happening in the public sector. To put it another way, the public sector has been falling behind: simply catching up a bit will not trigger additional demands from those who have been lucky to maintain the value of their pay,
So it seems to me that neither of these theoretical concerns applies now or in any likely scenario this year.
I agree
These concerns can be dismissed
Buyers have choices: they can pay the higher price asked, or they can buy something else, or they can refrain from buying.
If people earn more, they are more likely to choose the first option. That is why wage rises to match inflation are deemed to be inflationary. I wouldn’t call it “a lie”; it is just a different model of the economy.
I am not advocating for pay restraint; I am pointing out that if people have more money in their pockets, they are more likely to accept the higher prices, and inflationary expectations are more likely to become entrenched.
You are, it seems advocating the ‘keep them hungry’ model
Wrong, I am in favour of better pay for people who work in the public sector. I am pointing out that if people have more money, they are more likely to accept the higher prices asked. One then needs to think on what measures to take to avoid an inflationary spiral to start spinning.
There is not inflationary spiral spinning, unless you are talking about the one now heading sharply towards deflation.
So what are you saying in that case?
Woah, woah, woah, woah there!
Now hang on a minute.
If wages match inflation, is inflation still ‘inflation’ as we know it? Is it still a problem?
And if it is a problem, then who in the economy is it a problem for please? I think that I know.
And lets consider the lost output years of austerity too – we’ve lost so much time and investment money in 13 years of Tory rule that the obvious thing people will do with a wage increase is spend to close that gap – on repairs to the house, a new vehicle etc (things have a habit of wearing out don’t they?).
So really, after a period of low spending, a period of active spending (driven by higher wages) would be expected to follow naturally as a means as to maintain a certain standard of living anyway (not to go beyond it).
Which to me has always shown me just how stupid austerity is, but also what a self reinforcing twisted self fulfilling policy it is ergo: If you deprive people of money – well of course they’ll bloody spend it if they then go and get some eventually. Jesus!
What is happening at the moment is that in the face of inflation, we are not being given a choice are we – it’s being imposed on us?
The only people who could benefit from austerity with low domestic consumption are exporters – but then we have to think about the problems caused by BREXIT don’t we?
So really who benefits from low wages and the odd notion that real pay causes inflation?
1. Capital – investors and the management class like to corner financial output for themselves – not workers.
2. Governments who want to privatise – low wages are attractive to investors in these new markets (see 1).
3. Low wages are a form of social class control. I’m no Marxist but even I can see that. Money is powerful by its presence AND its absence.
4. Low wages and any sort of low investment is a means of how to signal that you are divesting yourself of something – destroying it from inside and altering public perception – read Chomsky.
5. Credit issuers benefit – helped by the other big inflation lie – interest rate hikes – using inflation to um, er fight inflation. Hmm. Right.
Cui bono eh!? Cui bono?
This is the academic economist’s perspective that absolutely everyone in an economy is operating in a free market – at least of choices. It has always been a mystery to me how such a hypothesis. so abstracted from the real world can be sustained by intelligent prople. The poor may be juggling sharply rising energy, food and other essential costs in a period of rapid inflation. The measurement of the ‘best’ option in such a money constrained resource crisis may defy rational choice between two or more evils. They may also be choices falling on people, who for whatever reasons, may not be best equipped to make difficult rational “choices” (which economists rarely make under any pressure at all, save a journal deadline); either for themselves or their family; and may look for what seem better, or at least easier options; whether in the short-term forgetfulness of alcohol (or worse), or the expensively unhealthy soothing relief offered by tobacco (the preposterous RA Fisher’s ‘soothing weed’). The cost of addictions, of crime, of lost education and opportunities; of lost talent, by expecting the poor to make impossible ‘rational choices’; is however never, ever measured. It is there of course; in the national debt, in the profligate waste of resources entailed in the cost of this gross failure to protect people, and instead pursue the idiotic economists and their daft, wanton, spendthrift ideas, which waste human life, with casual indifference.
All this because poverty elimination, should be the prime objective of politics, not ‘rational choice’ (see Levin and Milgrom, ‘Introduction to Choice Theory, 2004: for a critical analysis;. The first sentence sets the scene “Individual decision-making forms the basis for nearly all of microeconomic analysis”. It is, however fraught with technical and observational difficulties reviewed by Levin and Milgrom that it is fair to conclude, have never effectively been solved).
The total elimination of poverty is a demanding target; but it is infintely better, and nobler than a neoliberal agenda that depends on using poverty as a threat to hang over everyone; in order to protect the trashy society we have created – that treats people as means, and not ends (Kant’s ‘Moral Imperative’, which I use here because even Kant, the supreme moral rationalist, required a fundamental respect for persons that could not be negotiated as if morality was some cheap deal in a car boot sale).
Thanks
If people have more money in their pockets they are more likely to accept higher prices!
ONLY if they have so much more money in their pockets that they don’t have to worry about price. If you really think that public sector pay rises would result in that situation, you don’t understand reality.
I have no idea to whom you are responding, but if to me, I do no understand the relevance to the point about ‘rational choice’ I made, or the actual circumstances of inflationary rise and fall we actually face. I just wished to make that clear.
I think we all have to be careful how we phrase our statements, and the use of: can, could, will, must, etc.
➡️ Can public sector pay rises cause inflation? – Yes. Give everyone a £1-million pay rise.
➡️ Will public sector pay rises cause inflation? – They could.
➡️ Must public sector pay rises cause inflation? – Definitely not, give everyone a £1 pay rise.
We haven’t even considered whether a below-inflation pay rise causes inflation. As a teacher without a pay rise in 5 years, my purchasing power has gone down, implying that the cost of everything has risen.
when people say “but the government will incur a bigger deficit if we increase public sector pay by X”, before even getting into the argument about whether govt needs to borrow or not, I always point out that the treasury immediately gets income tax & national insurance back, and before too long the rest of the pay is returned via tax to the Government, plus any additional revenue from multiplier induced activity.
so – questions to you, Richard:
– How far ahead does the government budget when looking at public sectory payrises?
– How long do they assume it will take to recoup all of the funds through taxation?
– Do they use a multiplier effect in calculating this?
– Otherwise – how long should we budget/expect this recouping of spending + multiplier effect benefits to show up?
In general the government forecasts for two years and then always assumes the economy returns to the mean, which is absurd
On multipliers, the Treasury broadly assume they are all less then one, and often significantly so, which is absurd when there is amply evidence to the contrary
The reality is multipliers on pay should be recovered in town years and have an impact for sometime thereafter
Surely you meant ten years when you wrote town years.
Sorry
Via Joe Walsh, The London School of Economics wrote recently:
“Public sector pay increases do not translate into higher inflation.”
➡️ Does public sector pay drive inflation? February 21st, 2023
https://blogs.lse.ac.uk/politicsandpolicy/does-public-sector-pay-drive-inflation/
Very good
Thanks. That analysis is consistent with the IMF research that wages catch up after a period of inflation, but that does not trigger further inflation. That is, there is no wage-price spiral. https://www.imf.org/en/Publications/WP/Issues/2022/11/11/Wage-Price-Spirals-What-is-the-Historical-Evidence-525073
Agreed
Richard,
Maybe you want to read about the velocity of money and the money supply? It might help you narrow down much of your claims are indirectly or directly false.
There are so many statements that you’ve made without evidence, many of which are ambiguous at best or downright lies at worst.
Your whole article lacks credibility as you don’t support any of the statements made.
Go on. Tell us about the impact of the velocity of money, which is declining dramatically.
Whilst you are at it , fully reference your claims unlike every troll that ever existed, you included.
@ Richard,
The text of your post answers the question of whether pay rises, particularly in the public sector, have caused the current level of inflation.
This isn’t, though, an answer to the question posed by your title.
So let’s just accept that increases in public sector wages don’t create inflation…
It will certainly increase demand for goods and services from those same people who have more money to spend, resulting in an increase in prices aka ‘inflation’.
Further, private sector workers, who will be the ones paying the extra taxes to fund these public sector pay rises will then also be demanding similar pay rises to compensate their higher costs, feeding directly into the costs of producing goods and services and increasing prices aka inflation.
If you claim that taxes don’t need to rise to pay for these pay rises – that we can just print money instead – than that’s an increase in the money supply which, as economists know, will lead to inflation.
How many errors can a person make in one comment?
Why does increased demand result in inflation when am economy world at less than full capacity, as ours 7ndoybtedky does? It does not, of course.
And since private sector pay leads public sector pay why on earth will the phenomena you note on pay arise?
As for ‘money printing’, you do know that more than 97% of money is not printed, don’t you? And that more money is created by private sector banks than the government, about which you seen unconcerned? And maybe the lack of evidence that money creation has caused no inflation has passed you by?
Before you comment again learn some real economics, not the fantasy stuff.
“increases in public sector wages [..] will certainly increase demand for goods and services.”
So let’s suppose there is a demand for more coffee. People who had to close their cafes now re-open them. No inflation. It is only restoring the status quo.
With increased supply and demand, stability is restored, people are earning, paying taxes, and everyone benefits.
Mr Mawby believes an increase in demand causes inflation; so do not stimulate demand. The result? No growth. No investment. We know that works because that is how the Conservative Government has been operating for thirteen years.You have a rational choice: flatlining, or recession – take your pick.
The poor pay the penalty, and those who have savings are happy enough, because as interest rates are increased to tackle heterogeneous inflationary factors over which a Central Bank has no control whatsoever, they can sit on reasonable returns for no risk; when, after all, they can’t find anything better to invest in without taking risks they do not want to take; and now can see the heterogeneous factors soon falling out the inflation calculation, simply because of the time lapse; and the world adjutment of resources to the problems. When the inflation cycle resets the only big losers are the poor; the politcal ‘easy meat’ in an FPTP system, who do not vote, or are corralled and over-represented in old industrial constituencies FPTP perpetually designs for the political losers (the counter-intuitive ‘rotten boroughs’ of 21st century neoliberalism).
This is the lunatic world we live in. No doubt Mr Mawby will also believes we are ‘over-regulated’. There are two answers to that blunder.
1. Building regulations. Grenfell demonstrates what happens when you either do not have the regulations; or as the devious Conservatives have perfected their methodology – they cut the resources to implement the legislation that exists. Austerity is always the excuse for the catastrophe; but the Conservatives just wring their hands and tell us: ‘not me Guv’.
2. The Shadow Banking sector. Totally unregulated, derivative-driven, out-of-control and run by the same greedy lunatics that bring you every financial crash in history. Coming to your neck-of-the woods soon. We never see it coming, because we aren’t regulating it.
Thanks
I suspect Mr Mawby will not respond
“ Next year it (inflation) may well go negative and prices might fall, although not by very much. That is going to happen because the arithmetic makes that outcome nigh on inevitable, unless there is another worldwide shock like another war.”
Guess that makes another war (or similar concocted disaster) a nigh on certainty.
Of course public sector pay doesn’t create inflation, so in reality what is the root of inflation. In the UK there are four reasons and in the EU really only one.
In the UK there are no rent controls and tax breaks for the parasitic BTL scum. Second home owners can avoid local taxes and capital gains tax on property sales can be mitigated in various ways. Commercial property and residential property values are insane. These are the bedrocks of inflation in the UK. If normal rates of % are levied on mortgages, it will trigger the biggest crash in property values and a huge devaluation of Sterling. Sadly you have no real alternative to the Nasty party. The Labour party has had all the real socialist and social democrats stripped out and is led by a klootzak that sold his soul, if he actually had one, long ago. The overall passivity on the island is sickening, mouth achieves nothing but that’s the path so many of you have chosen
In the EU no government anywhere has made any attempt whatever to crack down on the obvious unjustified profiteering going on for so long. I’m lucky living in France we don’t have BTL scum, zero hour contracts, rents are strictly controlled and as of last year renters no longer have to pay tax d’habitation. Property owners have in some cases had to pay some steep rises in tax foncier. The inflation here is in food prices and everyone can see those which are justified and those that are pure profiteering.
If the war in Ukraine kicks off into Europe proper a totally unknowable future awaits us all and inflation will be the least of our problems – vamos a ver.
Richard,
This is slightly off topic, but it is why I don’t think inflation will fall far.
I have never understood the Mosler/Kelton idea that imports are a benefit and exports are a cost. As far as I can see international trade is just like any other trade, selling goods and services and using the money you receive to buy things you need more. Potentially win/win. The only difference is that a currency exchange is involved. If a country exports more goods and services, more of its currency needs to be bought, and the exchange rate improves. If a country exports less, or an essential import rises in price, its currency becomes less valuable.
If the effects of international trade are mediated via exchange rates, there are several consequences.
First, if one export sector is particularly successful, it makes it harder other export sectors to compete (the US rust belt effect).
Second, if a specific export sector is successful, it makes imported goods cheaper, but will not help everyone.
Third, raising interest rates should improve exchange rates temporarily, again making imported goods cheaper. However, it will worsen the balance between imports and exports, causing more harm in the long run.
On this model, unless imports and exports come into long-term balance, the £ will continue to fall and inflation will remain high. But almost everything the Government has done over the last 12 years is likely to keep worsening the import/export balance, weakening the exchange rate, and giving persistent high inflation.
I think the Mosler claim on this to be completely wrong
I am unsure whether Stephanie Kelton has endorsed it
It would still be wrong if she had. It’s total nonsense
It is also totally independent of MMT
There will be more on Mosler nonsense this week
Richard,
Apologies for using the M word.
I think that exchange rates and imports/exports ARE relevant to MMT and may be a bit of a blind spot. Because MMT focuses on currency issuers/users, it can use the neoclassical approach to modelling, which is to ignore the bits that don’t fit.
We agree that raising interest rates is a bad idea but for different reasons. The immediate harm is obvious, but for exchange rates, I suggest it is rather like giving a fix to a drug user. It provides temporary relief, but by making exports less competitive, it makes things worse in the long run.
A currency-issuing country can’t solve an exchange rate problem by printing more of its own currency. It has two ways of achieving a stable exchange rate. It can aim to become as self-sufficient as possible. Or it can export enough to balance its need for imports. For politeness’ sake, I won’t burden you with my opinion of the Government’s record on either of these objectives.
PS On M***** I only need to think of owning a field of turnips.
PPS Thank you Ian Tresman for useful links (though I struggle with Bill Mitchell, who never uses one word, when ten will do)
Re: Import/exports benefits
I don’t know the answer to this one as I don’t understand it well enough. But I found the following which may help readers see who said what and when. Of course views may have changed since originally being stated:
➡️ Feb 2014 L. Randall Wray: MMT and External Constraints https://neweconomicperspectives.org/2014/02/mmt-external-constraints.html
➡️ Sept 2016 Mosler and Kelton: Real Terms Of Trade: Imports are a Benefit, Exports are a Cost https://www.youtube.com/watch?v=0Q8c9Z7Dexs
➡️ May 2018 Steve Keen: MMT’s ignorance of economic thought https://www.patreon.com/posts/18998966
➡️ Jan 2019 Bill Mitchell: There is no internal MMT rift on trade or development https://billmitchell.org/blog/?p=41327
I am with Steve Keen on this
In fact, we have discussed it
Politely, Mosler’s comments in that video assume currency has no value
Politely, that is absurd
These are my thoughts for what they’re worth:
Imports
➡️ If I import stuff then I benefit.
➡️ I can get more stuff by importing them, because they are often cheaper
Exports
➡️ If I sell stuff and get money, I benefit
➡️ The reason I export is because I can export at a higher price
Is there a net benefit? That must surely depend on the stuff and the cost. At the end of the day, the government can always spend into the economy, and I can import more stuff, or manufacture more stuff to export.
It looks like a win-win for everyone, except when prices go up (eg. energy, fuel).
And finally on import/export, the questions we should be asking are based on the costs:
➡️ Is someone being exploited? That is a cost.
➡️ Is the environment being damaged? That is a cost.
Fair
You say:
“Then there was the war in Ukraine. It was believed that this would create supply shortages for oil, gas, essential foodstuffs and fertiliser. As a result the financial commodity markets massively increased the cost of these products. As it turned out there were no such shortages. ”
But surely there was a shortage of cheap Russian oil and gas? This shortage was partly resolved with substitutes which are more costly to produce – like fracked US gas. I suspect sanctions against buying Russian oil and gas will lead to an increase in the cost of living for some time.
Have you noticed the oil and gas price?
I am not saying prices will return to where they were
But you have not made a case
Political economist Blair Fix uses neoclassic reasoning (not good) to derive a natural law: that increasing wages bring down inflation through the so-called “shoebox theory of monetary management.” Although satirical, he shows that economists can present arguments and reasoning to support the outcomes they choose.
See: March 2, 2023 Blair Fix, The Key to Managing Inflation? Higher Wages.
https://economicsfromthetopdown.com/2023/03/02/the-key-to-managing-inflation-higher-wages/
An excellent article, well worth reading
In it’s simplest form, inflation (being taken as an increase in the cost of stuff) is caused by 2 things.
Firstly, the cost of the thing that’s being sold has gone up (see War In Ukraine and impact on fuel as a clear example). This could also be a result of Govt policy (We don’t want you eating sugar, so we’re putting a levy on sugar, which tracks through to the rvice on the shelf). That’s fair enough.
The other reason is that people selling stuff put their prices up in response to their customers having more money to spend. I’ll say that again… PEOPLE SELLING STUFF PUT THEIR PRICES UP.
Giving public sector workers a pay rise to match the previous price increases (which may or may not have been wholly caused by the first circumstance (war etc) will not in and of itself cause inflation. What will cause inflation is a further push by traders to increase their profits. Why does nobody EVER focus on that?
Me – “I’d like to buy that choccy bar, but it’s twice the price it was last week”
Shopkeeper – “Yeah, but you’ve had a payrise, so you can afford it”
Me – “But… that payrise was to cover the fact that you increased the price of it the week before!!”
Shopkeeper – “Sorry, guv. Inflation, innit? Pfft. I blame the people on the boats” (note – other bullsh*t deflectionary excuses are available)
Me – “Hmm… I blame you, you grasping pickpocket”
Woudn’t it be nice if people (mostly the media) recognised that price inflation isn’t caused by wage rises, but by corporate effing greed? I suppose it’s easier to blame greedy doctors and civil servants than it is to blame greedy corporates. Sad face.
Actually, inflation is always about people putting prices up
It can never be anything else
Why they put prices up is the question. Need, or greed? Those are the answers.