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Inflation down, pay up? Don’t believe the hype

Today’s inflation figures show price increases were slightly outpaced by wage growth. But Britain is still in its long recovery from 2008.

By Jonny Ball

This morning (16 August), the Office for National Statistics reported that inflation in the year to July stood at 6.8 per cent, down from 7.9 per cent in June. This will no doubt put a cautious smile on the face of the Prime Minister, who has staked his reputation on halving price hikes from their double-digit highs at the start of this year. But there will be few across the country preparing to crack open the champagne.

Over the last year, Britain has seen the biggest wave of strike action since the days of Arthur Scargill and the Battle of Orgreave. The junior doctors’ strike has remained more placid, so far, but the government has nevertheless faced allegedly “unreasonable” demands to restore real-terms salaries to the levels they were at in 2010. Such is the extent of the living standards crisis this time around that supposedly militant unions are willing to settle their disputes for a pay deal that will still leave workers with significantly less purchasing power than they enjoyed at a time when Nokia sold more handsets than the iPhone. Take teachers, for instance, who agreed to a meagre 6.5 per cent pay rise a fortnight ago, but whose real pay has gone down by up to 13 per cent over the last 15 years.

[See also: Is the Bank of England raising interest rates too far?]

Wages began their inexorable real-terms decline in the wake of the financial crisis, when the Cameron-Clegg coalition sensibly unleashed a period of fiscal tightening and public sector pay freezes. This was in response to a collapse in sub-prime mortgage markets in the US, and Cameron and Clegg attributed the government’s spending deficits not to speculative activity in derivatives markets, global recessionary forces, or multi-billion pound bank bailouts, but rather to the supposedly bloated pay packets of public sector staff.

In July the Trades Union Congress reported that the UK’s average take-home pay remains almost 3 per cent below its pre-financial crash level in real terms. It’s no wonder, then, that schools, hospitals and many other front-line services are suffering a recruitment and retention crisis. The UK has come 27th out of 33 OECD countries on wage growth over the last decade, but the government has repeatedly warned that allowing workers to be as comfortable as they were around 15 years ago would only hinder its ability to meet the PM’s inflation pledge.

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Remain diehards like to posit the EU referendum as the point at which the UK’s fortunes diverged with previous trends, and Brexit has certainly added more friction to the country’s import and export supply chains. But the truth is that productivity (the economy’s output per hour worked, which strongly correlates with wage growth) has hardly budged since 2008. Leaving the EU barely made a dent either way in the long stagnation of take-home pay. Britain has still not recovered from 2008. It found itself over-exposed and over-reliant on financial services, and successive governments were plagued by short-termism and an unwillingness to invest in a proper recovery.

Still, Britons can console themselves by watching the hilarious spectacle of a multi-millionaire chancellor, Jeremy Hunt (who sold his stake in an education course listing company for £14 million in 2017), and the Bank of England’s governor, Andrew Bailey, asking workers to show “restraint” over pay. Back in the real world, wages have not kept pace with inflation for a very long time, unlike the record profits posted by banks, energy giants, supermarkets and many more businesses currently engaged in “restoring margins” – in other words, price gouging. 

[See also: The age of greedflation]

But what makes today’s situation worse than at any point since 2008 is the fact that stagnating real wages are now accompanied by monetary tightening. When George Osborne imposed austerity across the public sector – planting the seeds for the collapse in services we’re witnessing today – workers were at least able to borrow cheaply and had low monthly repayments on mortgages, overdrafts and credit cards. The effects of fiscal retrenchment, pay freezes and departmental cuts trickling down through the economy could be partially offset by vast monetary expansion – ie cheap borrowing with negative real interest rates, meaning people are, in effect, paid to borrow and incentivised to spend and invest (usually in real estate or other unproductive assets). That historical blip is over: workers are now being squeezed on both sides by a Treasury and Bank of England that are purposefully using their policy levers to increase unemployment and induce recession in the fight against inflation. What’s more, the full effect of interest rate rises can take 18 months to work its way through the economy – many millions of people still enjoying fixed-rate mortgages from the better times are yet to get their rude awakening.

Don’t be fooled by the headlines. We’re far from out of the woods yet.

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