In:Inflation is the fault of the workers. Striking nurses and railway workers could be forgiven for believing that rising prices could be blamed for their pay demands. Jeremy Hunt said as much last week, as did Bank of England Governor Andrew Bailey.
Equally guilty are warehouse workers handing out products for Aldi, who have received a 10% annual pay rise, and security staff at East Midlands Airport, who have secured a whopping 17% overall rise this year. If wages account for about 70% of business costs on average, it must be true that wage increases are the enemy of those seeking to reduce inflation.
The chancellor said he could not review decisions to review wages for public sector workers without risking higher wages leading to higher prices. In Threadneedle Street, Bailey justified the base rate rise to 3.5%, snubbing workers who were getting a pay rise.
The Governor and most of his colleagues on the Bank’s Monetary Policy Committee believe the Aldi and East Midlands Airport deals are the tip of a large iceberg. The implication is that wage restraint will eliminate inflation and allow the Bank to freeze or even cut interest rates next year.
The question that belies the inflation debate is: how do the official figures showing an average wage rise of 6%, well below the 10.7% in consumer prices, square with Bailey’s story? How do payroll data that track the big deals offered by major employers this year in the public and private sectors reveal a negligible price boost when they show those deals average just 4%?
You can find the answer elsewhere. Perhaps shrewd corporations saw an opportunity to raise prices more than their costs rose, knowing that consumers had come to expect supersonic increases in shopping bills.
Paul Donovan, chief economist of UBS Global Wealth Management, analyzed the situation in America, where there is more detailed information about the corporate sector. He looked at productivity-adjusted wage cost growth in the hotel sector since the end of 2019 and found it to be between 5% and 6%. The prices of restaurants and hotels increased by 16%.
Donovan found that hotel operators are using fewer staff to improve productivity, limiting the impact of wage increases. This increase in productivity was channeled to shareholders, not consumers, who were fueled by the narrative that prices had to rise to keep up with rising wages.
More broadly, U.S. corporations posted quarterly profits of nearly $3 trillion in the three months to the end of September, up from $2.4 trillion two years ago and an average of $2 trillion over the eight years before the pandemic.
An analysis by Unite of Britain’s largest 350 companies showed a similar trend. profit margin was 73% higher in 2021 than in 2019. “Although sales were down in 2021, profits were still up,” said Sharon Graham, the union’s general secretary. “Even excluding energy companies, average profit margins still jumped by an astonishing 52%.”
Those numbers are the basis for CEO pay increases last year and this year, as well as the return of the city’s bumper bonus. More fundamentally, it suggests that Hunt and Bailey, the two most senior policymakers in the field, misunderstand business dynamics and how companies take advantage of a crisis to raise prices.
Official data shows that hotel prices are the main driver of UK inflation, so the rise in prices seen in the US could be replicated in the UK hotel sector.
There are hundreds of products in stores that have benefited from lower shipping costs, lower raw material and labor costs unlike today’s products, but prices continue to rise.
The only visible sign of bearish transmission is at the gas pumps, and even there the price is higher than expected, when recession in the industrial world heralds a big drop in demand.
Donovan says the campaign to “break up Britain” that challenged price growth after the 2008 financial crash needs to be cleaned up and given a fresh air.
Business executives may argue that profit warnings are on the rise. But according to data compiled by consulting firm EY, the hardest hit are retailers and consumer-facing companies, which are adjusting to the trend toward working from home and lower consumer spending as much as their workers’ wage demands.
Hunt and Bailey should take note. Governments can judge what they can afford to pay to fund public sector wage demands, but they shouldn’t use inflation as an excuse. The evidence is not on their side.