UK Inflation Up Again, Wages Close Behind

UK inflation in January rose to 5.5%, up from 5.4% in December, as measured by CPI. That is ahead of wages, which rose by 4.3% (including bonuses), in the three months up to the end of 2021. That means that wages are still lagging behind the increase in the cost of living by around 1.2%, but that is a much small lag than was being predicted by the Governor of the Bank of England in his last report, which suggested that real wages were set to suffer their biggest fall in decades. What is more the figures do not present the full picture.

On the one hand, the CPI figure understates the level of inflation even measured on the basis of the old RPIX measure. On that basis, UK inflation already stands at 8%. A working-class cost of living index would, already put inflation at over 10%, even before the effects of a 50% increase in energy kicks in. So, measured on this basis, workers' real living standards would be suffering a severe mauling, and that is also before they face higher taxes, higher mortgage payments, and cuts in benefits.

The higher UK inflation copies the much higher inflation in the US, which, on the basis of CPI, is already at 7.5%, and, in reality, is already way over 10%. In both cases, higher energy prices are a factor, but a much bigger factor is higher food prices. Food prices are rising at around 20% a year. The fundamental basis of this higher inflation, as described in previous posts, is the vast oceans of liquidity that central banks have pumped into the system, via QE, and which, over the last couple of years, has fed directly into pumping up consumer demand during the self-inflicted damage caused by lockdowns and lockouts. That inflation is not going away, and is set to have second round effects that will cause it to persist and increase. This is a reversal of what has happened over the last thirty years, when this liquidity was the basis for continual increases in asset prices, as QE was used first to buy and so inflate bond prices, and from there to inflate the prices of all assets.

Mike Howell of Cross Border Capital, has studied the relationship between central bank induced liquidity, and asset prices, showing the near identity in the movement of the two, as the graph illustrates. But, now, instead of that liquidity going into inflating asset prices, it is going into creating rampant consumer price inflation. The fact that inflation in both the US and UK is now over 7% is significant, because studies show that although there is no strong correlation between current inflation levels, and future inflation levels, once you get above the 7% figure that changes. That is because, above 7%, people start to really notice it, and to anticipate that it is going to continue and intensify, as the next chart shows.

Workers, if they can, demand higher wages, and businesses, increase prices further, as seen in this final chart, which shows it is not normally distributed, but has a long right-hand tail.

All of these charts are contained in John Authers' Bloomberg Newsletter. As Authers comments,

“This fits with the monetarist theory that inflation needs to accelerate and doesn’t merely stay high when governments are looking for a trade off between employment and rising prices. Beyond a certain level, people understand that more inflation is likely and adjust their demands accordingly. It also helps explain why the Fed is so concerned about inflation expectations and to suddenly try to bring price increases under control now, having been far more relaxed when inflation was still rising but safely below 7%.”

So, the question then is are workers in a position to demand the wage rises that will protect them against this inflation. The hope of central bankers, like Bailey and Powell, is that they are not. But, that hope is based upon their experience of the last thirty years. In a way its a bit like the expectation of NATO planners that Russia would not respond to their continued Eastward expansion, simply because, for the last thirty years, they never did. Inertia is a powerful thing, and if you have never seen anything different for thirty years, it is a powerful factor in making you think that things have always been that way, and always will be. Its like the man who falls from a 100 story building, and having passed 99 floors, having not yet hit the ground thinks it will never come. If journalists, academics and policy makers, do not start to hold influential positions until they are in their thirties, then you would have to be in your sixties to ever have known anything different, and those in their sixties tend to have retired, rather than holding these positions.

But, there is every reason, not only because of what is seen in these charts, to think that workers are not going to simply sit back, and accept below inflation wage increases. In the US, the so called quit rate, the number of people who simply quit their job, because they have the opportunity to get a better paid job with another company has been increasing steadily, and, now, it seems to be increasing in Britain too. This is an obvious, and individual, response to conditions, which only those who saw similar conditions in the 1950's, 60's and 70's have witnessed. During that time, with unemployment down as low as 1-2% (about 0.5% on current measures) workers frequently just moved from one job to another to get higher wages, or better conditions. That is before the ability of workers to join unions, and to quickly negotiate pay rises is considered.

Unemployment, in December, fell to 4.1%, down from 4.3%, which is back to where it was before all of the self-inflicted damage of lockdowns began. But, illustrating the point about the quit rate, in the last quarter of 2021 a million workers, in Britain, switched jobs. Not only is unemployment at relatively low levels – though way off the 1960's levels – but the number of vacancies is also at a high level. In the three months to the end of January, the number of vacancies rose to 1.3 million, a record high. There are 4.3 vacancies for every 100 existing jobs, which is again a record high. In some spheres the jobs shortage is even more marked, for example, the well known shortages of lorry drivers, health and social care workers, hospitality workers, and so on.

In addition, employment itself is at record levels, having risen to 29.5 million. Moreover, similar to the rise in the quit rate, the proportion of inactive workers, that is those of working age, but who are not seeking work, has also risen, now standing at 21.2%. Again, this illustrates, however, a moderating factor as far as these labour shortages are concerned. When wages rise high enough, some of those within this 21.2%, will be tempted into the workforce, so that labour supply will increase, albeit at the price of these higher wages and better conditions. Similarly, there are a million workers on zero hours contracts, and many more working part-time, so that, as employment increases, they will move into full-time employment. Then there are the 5 million small business people eking out a living mostly from self-employment, or using family labour alongside their own. Their wages are usually lower than those of an average permanent wage labourer, and so they form a reserve army of labour, much as the peasants did in the past, who can be drawn into permanent wage labour. All of that, gives capital some scope to increase employment further, and so expand the social working-day, but it comes at the cost of higher wages.

Finally, then, we come to the fact that, the comparisons of wage rises and price rises, so far, are based, mostly, on the wage rises that employers have had to make in order to get the labour they require, as for example with the 30% increase in HGV wages. These cover only a fraction of the total workforce. So, even if these wages have been rising at an average of around 14% a year, which some surveys suggests is the case, if they represent only about a third of all workers, that explains why the wage rise figure is still only at around 4.3%. We are, however, starting to enter the Spring period during which unions begin to submit their pay claims for the year ahead, and based on the known and expected increases in costs of living, it will be surprising of unions do not submit claims for between 15-20%. Already, we have seen an increase in unionisation both in Britain and the US, and an up tick in industrial action.

Workers must now be beginning to feel firmer ground under their feet as economies begin to boom, and those are the conditions, as Marx and Trotsky described, when they are also able to rebuild their basic organisations, to take control of their lives back into their own hands. It is also the conditions when employers, seeing the economy booming, are least likely to resist such demands, because they cannot afford to lose production due to industrial action that would lose them market share to their competitors. So, expect large double digit wage settlements over the next few months, and, as firms then try to recoup those costs, via higher prices, expect central banks to increase liquidity further to enable it. Then inflation will really begin to rise to the kinds of levels of the 1970's and 80's, forcing central banks to raise policy rates further, as they chase after sharply rising market rates of interest and bond yields.

And, given the correlation between liquidity and asset prices, illustrated in the chart above, expect asset prices to crash dramatically.