IIs Inflation the Workers’ Fault? Striking nurses and railroad workers came to believe that rising prices could be blamed on their demands for wages, which was understandable. Jeremy Hunt said the same thing to Bank of England Governor Andrew Bailey last week.
Likewise, Aldi’s warehouse workers who deliver their goods with a 10 per cent annual pay rise, and East Midlands Airport security staff, who are getting an overall pay rise of 17 per cent this year, must also be blamed. If wages account for around 70% of business spending on average, then substantial wage increases must be the enemy of those seeking to bring inflation down.
The chancellor said he could not revisit decisions on pay reviews for public sector workers without risking a knock-on effect of rising wages leading to higher prices. On Threadneedle Street, Bailey lashed out at workers raising wages to justify raising the base rate to 3.5 per cent.
The Governor and most of his colleagues on the Bank’s Monetary Policy Committee believe the Aldi and East Midlands Airport deals are just the tip of a larger iceberg. That means wage caps will remove the impetus for inflation and allow banks to freeze or even lower interest rates next year.
One question plaguing the inflation debate: How does official data showing wages rising by an average of 6% – well below the 10.7% consumer price index – fit into Bailey’s narrative? How could pay settlement data tracking this year’s big deals offered by major employers in both the public and private sectors reveal triggers for runaway prices, as these deals averaged only 4%?
Answers may be found elsewhere. Dodgy companies may have spotted an opportunity to raise prices above and beyond their own cost increases, knowing that consumers have come to expect supersonic increases in shopping expenses.
UBS Global Wealth Management Chief Economist Paul Donovan analyzed the situation in the US, where there are more details on the corporate sector. He looked at the rise in wage costs across the hospitality industry and adjusted for productivity since the end of 2019, finding increases of between 5% and 6%. Restaurant and hotel prices rose 16%.
Donovan found that hoteliers are increasing productivity with fewer staff, limiting the impact of wage increases. This efficiency gain is passed on to shareholders, not consumers, who are fed a story that prices need to rise to meet rising wage bills.
More broadly, U.S. companies made nearly $3 trillion in quarterly profits in the three months to the end of September, up from $2.4 trillion two years ago and an average of $2 trillion in the eight years before the pandemic.
The Unite union’s analysis of the UK’s largest 350 companies shows a similar trend – with profit margins 73% higher in 2021 than in 2019. “Profits have soared despite lower sales in 2021,” said the union’s general secretary, Sharon Graham. “Even after removing energy companies from the statistics, the average profit margin still jumped a staggering 52%.”
The numbers underpin soaring executive pay last year and this year, as well as the return of fat city bonuses. More fundamentally, it suggests that Hunt and Bailey — two of the most senior policymakers in the field — have misunderstood business dynamics and how companies use the crisis to raise prices.
Price gouging, popular in the US, may have been replicated in the UK hotel industry, with official figures showing hotel prices are one of the main drivers of UK inflation.
There were hundreds of products in stores benefiting from lower shipping costs, lower raw material costs and lower labor costs, not unlike today, yet prices continued to climb.
The only clear sign of falling prices is at gas pumps — and even there, prices are higher than expected when the recession in the industrialized world heralds a sharp drop in demand.
Donovan said the “blackmail Britain” campaign, which saw prices soar after the 2008 financial crisis, needed to be revived.
Business leaders could argue that profit warnings are on the rise. But hardest hit are smaller retailers and consumer-facing companies, which are adjusting to the work-from-home trend and a drop in consumer spending, as well as staff wages, according to data compiled by consultancy Ernst & Young. Require.
Hunt and Bailey should take note of this. The government can judge how much it can afford to pay to meet public sector wage needs, but they should not use inflation as an excuse. The evidence is not on their side.