UK nominal, or money wages have risen 6% year on year. Although that figure is the same as the previous month, it comes at a time when consumer prices are rising at a slower rate, as the effects of monetary tightening by central banks take effect. On that basis, real wages rose by 2.3%, year on year, last month, compared to 2%, in the previous month, and 1.7% the month before that. This is in stark contrast to the claims by the Bank of England, last year, and seized upon by catastrophists and speculators that UK workers were going to see a sharp fall in living standards, as wages failed to keep pace with prices!
In fact, this is the tenth month in a row that wages have risen faster than prices. Although the UK went into a technical recession at the end of 2023, even on the basis of GDP/National Income, it was only very slight, and has already been reversed in the first quarter of 2024. However, as I set out last year, the GDP figure is misleading, because of the effect of inflation, and the consequent tie-up of capital, which gives the illusion of a fall in revenues, as part of the produced surplus value is used to replace consumed constant capital, rather than being realised as money profits. The increased growth in the UK, especially with all of the constraints imposed by Brexit, means that labour will continue to be placed in a strengthened position, and real wages will continue to rise, no doubt leading to the Bank of England seeking to enable firms to compensate, by raising their prices, to protect profits, leading to another rise in inflation.
That comes as the US economy continues to surge, and its own prices and wages to rise defying the predictions of an end to inflation. Even Europe, hamstrung from its self-imposed injury from boycotting Russian food and energy, which caused its economy to stagnate last year, is looking stronger as 2024 proceeds. A tick up in economic activity in the US and Europe, and UK, as well as signs of economic activity rising in China, is mutually reinforcing, despite the attempts to curtail global growth, via trade wars, being pursued by Biden and the US.
As I wrote some time ago, higher interest rates are not a mean of reducing inflation. To reduce inflation requires that the standard of prices not be devalued, which means not increasing the currency supply excessively. It is the policies of QT introduced by central banks, at a time of rising output that has slowed inflation, not higher interest rates. Higher interest rates were designed to slow the economy, and, thereby, to increase unemployment, stopping the rise in wages, which in turn feeds into demand for wage goods, and so further economic expansion. But, as I set out more than a year ago, that was not going to work in the current environment, and phase of the long wave either.
Real interest rates remained negative after inflation for a long time, after central banks began raising them. That meant that an incentive to consume both productively and personally continued. Raising interest rates to a positive level would have required raising them above CPI, which would have cratered asset prices, causing a new global financial crisis. As it is the rise in interest rates caused asset prices to fall by around 30%, and up to 40% in real terms, though, as the idea that central banks may start to cut rates has taken hold, those asset prices have recovered, at least in nominal terms.
One means of those rising rates slowing the economy, via reducing household consumption was expected to be the effect on mortgage rates. As households faced much larger monthly mortgage payments, it was thought that this would mean they had less money to spend on other forms of consumption. It didn't work out like that. Firstly, higher monthly mortgage payments meant that new buyers could offer much less for houses, causing house prices to fall. So, for these buyers they had the same amount as before to spend on other things. Secondly, in conditions of labour shortages, workers have been able to respond to higher mortgage and rent payments in the same way as for any other prices, by requiring even higher wages.
But, also, for many years, following 2008, savers were offered negligible rates of interest on their savings. In the last year, banks were forced to significantly raise their nominal rates on savings accounts. Although, these remained negative, whilst inflation was running at 10% plus, and led to banks offering relatively high, fixed rates on savings for 1,2 and 3 years, in the expectation that rates could go higher still, when, in fact, inflation began to drop, they found themselves tied into these fixed savings rates, which had now become noticeably positive. For example, NS&I, last year offered a one year fixed rate savings bond, paying 6.2%, which with CPI, now, running at 3.2%, means a positive 3% rate of interest.
Consequently, many people who had savings, have found that they have gone from getting no interest on them, to now receiving sizeable amounts, and that is money that they now have to spend. Some of those that had turned to becoming buy-to-let landlords, as a result of the negligible amounts of interest on their savings, now have a significant incentive to sell those properties, and just stick the money in the bank. Even with banks having reduced their savings rates to around 4%, a buy-to-let landlord with £300,000 tied up in properties, would get £12,000 in interest, if they sold the properties and put the money in the bank, with no hassle, and no prospect of sustaining large capital losses, when asset prices crash.
With Minimum Wages having risen, and the pensions Triple Lock in place, there is a lot more increases in household revenues to come. With the economy picking up, and labour shortages growing, wages, particularly in the private sector, are likely to rise faster than prices for some time to come. The laggard is the state sector, where, despite the much higher levels of unionisation, workers have seen their pay rise much less than in the non-state sector, largely because of the ineffectiveness of union bureaucrats that have persisted with useless and demoralising one-day protest strikes, rather than all out strikes. That is unlikely to continue in the next year, as a new round of pay negotiations runs into the existing unresolved negotiations. Workers, now, in a stronger position are unlikely to put up with that, and begin replacing those leaders with a new leadership, a process that also needs to be carried forward into the Labour Party.
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