It had to happen sooner or later.In the face of the social emergency of rising prices, the Tories have—inevitably—blamed ordinary people. Boris Johnson last week said the prospect of a “wage-price spiral” is the real threat. Under this theory of inflation, workers ask for more as the cost of living crisis worsens.
In turn, bosses raise prices further to protect their profits after spending extra on wages or make more money from workers’ ability to buy stuff. Typically, politicians and establishment economists don’t blame the bosses for hiking prices but workers for demanding more wages.
Yet wage rises aren’t driving inflation at all. Average wages in Britain are falling at the fastest rate for more than two decades. Now, taking inflation into account, average total pay between February and April this year has fallen by 2.2 percent compared to last year.
That’s according to the Office of National Statistics, using the CPI rate of inflation, which doesn’t take housing costs into account. So the real fall will be even higher. But it suits governments, bankers and mainstream economists to fixate on wage “growth” because the alternative is to acknowledge the real problem—profiteering.
All sorts of events can trigger price rises, and a number of them have all come together in the past two or three years. Shifts in supply and demand don’t determine a commodity’s price.
But they can cause prices to fluctuate around its value, which is determined by the average labour time required to produce it. A sudden shortage in supply, or a sudden increase in demand, can lead bosses to hike prices.
So when the coronavirus pandemic shut down production and disrupted distribution, it caused commodity shortages that were then followed by increased demand. At around the same time, a number of governments shifted away from coal usage and increased demand for liquefied natural gas.
Gas prices rose even higher after Russia invaded Ukraine, and Western governments responded with demands to stop buying its gas. Oil prices rose too, as the Opec+ grouping of oil producing countries refused to speed up production. It was a similar story with food prices.
All of these are problems that stem from the chaotic, unplanned, nature of capitalism. But the thing that turns these price spikes into inflation is profiteering. For a start, bosses take advantage of shortages and demand to make mega profits, as the fossil fuel companies have done.
Bankers and investors play a role too, speculating on commodities in shortage—investing and buying to later sell at a profit—pushing and holding up prices. And all of these factors cause a knock on effect too. When bosses have to pay more for materials, they raise their own prices to protect their profits.
These price rises get passed right down through a chain reaction to the goods that ordinary people buy in the shops. So inflation doesn’t happen because workers demand more wages—and nor is it some independent force of nature.
It’s because bosses want to boost and even protect their profits—and make us pay for it.
“When a wage-price spiral begins, there is only one cure and that is to slam the brakes on rising prices with higher interest rates,” Boris Johnson said earlier this month. And, sure enough, last week the Bank of England raised its interest rates by a quarter—from 1 percent to 1.25 percent.
It followed in the footsteps of the US Federal Reserve, which decided just hours earlier to raise its own interest rate by 0.75 per cent. When central banks do this, it means they charge commercial banks more to borrow money from them.
The idea is those banks will then pass the cost on to their customers. People and businesses will be less able to spend money, and prices will come down. People who bought their houses with a loan will end up with more debt. Landlords will likely pile extra costs on renters.
Central bankers hope for a rise in unemployment too, as bosses either sack workers or stop recruiting new ones. In an interview Federal Reserve chair Jerome Powell complained that bosses’ demand for workers was so high and unemployment so low that it was pushing up wages.
He hopes increasing interest rates will force wages down and unemployment up, even at the risk of triggering a global financial crash. Powell is now crossing his fingers for a “soft landing”—the hope that the coming crash and increasing unemployment will be limited.
The European Central Bank is also preparing for a new “debt crisis”—where countries that have borrowed from it can’t pay their loans back—after it raises its interest rates next month. The last one, after 2008, ended in the bank enforcing austerity on countries such as Greece.
That’s the future governments, and their central banks are prepared to risk to keep our wages down.
For the big banks and businesses, shortages and disruption are a chance to make huge profits. The only expense is the misery of ordinary people. All the big energy companies have cashed in on demand for gas and oil by keeping prices high.
BP’s profits in the first quarter of the year rose from £2.1 billion to £5 billion in 2022. For Shell, from £2.6 billion to £7.3 billion, and for Exxon Mobil, £2.2 billion to £7.1 billion. Even US president Joe Biden wrote to the bosses of energy companies to complain, “At a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable.”
Bankers are cashing in on food shortages too. For them, the war in Ukraine is an opportunity to profit. In May, investigative journalism outlet Lighthouse Reports revealed how banks encouraged their clients and traders to invest in agricultural trading funds. It said this was likely pushing food prices up even further.
That means disaster on a mass scale. The World Bank has estimated that for each percentage point increase in food prices, 10 million people are thrown into extreme poverty. Recently the UN humanitarian coordinator warned that Somalia was “on the brink of a deadly famine that could kill hundreds of thousands.” He said that 213,000 people face starvation by next September.
Right on war path