Inflation may have ‘peaked’ apparently. This raises doubts about the wage-price spiral

January 22, 2023

by Martin Odoni

FOREWORD: I am rather blatantly inventing a rule-of-thumb here, but in the end, this makes no less sense than the actual economic and industrial policy the Government stubbornly persists with. So I decided, what the hell, I will go ahead with it.

According to the Bank of England Governor, inflation may have peaked. I refuse to get too excited or relieved about this as it is exactly the same message he gave just before Christmas, and, to be honest, rising prices are still a problem, even if the rate of rise has slowed a couple of tiny amounts.

It also has to be emphasised that the inflation slowdown has been caused entirely by a big downturn in international fuel prices as the shortages of last year caused by the Russo-Ukraine War have eased. That net inflation is still around the ten per cent mark when fuel prices have been tumbling tells us that a lot of every-day expenses – especially food prices – are still turning the screw with great harshness.

The underlying weakness in the economy has not gone away then, but the redeeming scraps of news do offer food-for-thought.

Current inflation is irrelevant to pay rises

One of these morsels is that the Tories, inevitably, are fighting against the current heavy tide of industrial action demanding pay increases and improved working conditions. One of the predictable justifications the Tories have taken refuge in is the so-called ‘wage-price-spiral’ i.e. the theory that wage rises increase the spending power of the public while reducing profits for companies, so demand increases and prices go up in response, leaving people needing another wage rise etc.

Historical evidence that this really happens as inevitably as right wing commentators assume is in fact quite sketchy. There is some evidence that it happens in some circumstances, but it is not very consistent. But what I can suggest is that, insofar as any conclusions can be drawn so far, it is clearly not relevant to the current crisis.

Some of the strike action has already succeeded. As a couple of examples, the communications workers successfully extracted a sorely-needed 16% pay rise in November, and Scottish refuse workers in September secured a 10% rise.

At the same time as these increases have come into effect, inflation has gone down. It is impossible to draw any sharp conclusions from that, but it does seem to imply that the increases are nowhere big enough to do any harm. And given that the strikes are largely by public sector workers and not widespread across all sectors, this implies that even if all of the strikers got what they demanded, it really would not do any real damage. If any inflation does result, taxes for the rich can go up to siphon off superfluous cash supply, (which is what caused much of the inflation prior to the Ukraine War; the Government was correct to introduce a furlough scheme during the Covid-19 pandemic, but failed to tax away the excess from the richest – especially landlords – after the lockdown ended). The Government could start by putting the same amount of effort into clamping down on £42 billion of unpaid taxes as they do into pursuing poor people for claiming £11.78 too much in benefits. Getting that £42 billion out of circulation would certainly do a lot more to apply a brake on inflation than removing £11.78 ever will.

Treating the symptoms and not the causes

It is tiresome to note that when economic problems emerge, the answer is never to address and counter the underlying cause – in this case landlords absorbing furlough money from an expanded supply – but always to make life even more difficult for the poorest.

Currency can depreciate in value with an enlarged supply. So why does the Government not reduce the supply by taxing the surplus landlords took in during the Furlough Scheme?

It is hardly as if the refusal to oblige wage claims is saving any money. On the contrary, even the Government itself is admitting the lost days of work caused by some strikes are costing more than the actual wage rises would allow. The fact that the strikes are causing harm may be regrettable, but so do pay packets below the value of the labour, or poor work conditions, such as those the RMT Union are fighting. And the disruption also proves that the work is worth paying the extra for. If not, the strikes would have no effect.

After years of waiting patiently, sometimes under enormous strain, especially during the pandemic, to have a reasonable share of the UK’s mighty wealth, Britain’s public workers can cope no more. If industrial action is the only way to jolt Governments and the privileged out of their complacency, and to acknowledge in a genuine way the quality of what public workers put into the economy and society (not just clapping; I cannot picture Rishi Sunak accepting a round of applause as all the reward he should get any time he gets a Bill through Parliament), then industrial action it is.

Strikes without end?

This does not have to be unending. It just needs the Government to swallow its pride and accept that, just for once, it is time someone other than the working poor suffered all the strain of economic turmoil in the UK.

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