By Nick Clark
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Are increases in workers’ wages to blame for higher inflation?

Rising prices are hitting workers’ living standards. Nick Clark asks what causes inflation
Issue 2783

Workers shouldn’t pay for inflation

Inflation can leave us feeling pretty helpless. The prices of some of the most everyday things—food, petrol, rent—are going to go up leaving us all essentially poorer.

It’s happening all over the world. There’s nothing we’ve done to cause it, and apparently nothing we can do to stop it happening.

You’d certainly get that impression from the mainstream economists in the newspapers, the leading politicians, and the heads of central banks.

They talk about inflation as if it’s some independent force of nature—something to do with human behaviour, but with a life of its own.

But inflation doesn’t act of its own accord.

Capitalist competition drives inflation as rival bosses rush to buy up materials and so push up the price.

They try and make up for this by bumping up the price of the products they produce, which has a knock-on effect on ordinary people.

Prices

Whenever possible, politicians and economists have tried to pin the blame on workers’ wages. If wages rise too high, they would say, prices rise to catch up.

But that argument doesn’t stick.

Wages have mostly been held down or cut over the past decade as part of austerity—and they are not rising with inflation now.

The free market right tries to blame state spending and intervention.

They argue that if the supply of money rises higher than production, demand will increase more than the supply of goods and services, pulling up prices.

But this argument doesn’t work either.

One of the ways governments reacted to the financial crash in 2008 was to effectively create more money and pump it into the financial system.

Inflation stayed low or even negative.

So now most mainstream economists have to admit that the worldwide rise in inflation has something to do with how their system is working. Or rather, how it isn’t.

Some explanations pin at least part of the blame on increased “consumer demand”—ordinary people wanting to buy things.

But they all accept that the disruption and shutdowns during the pandemic are at the root of the problem.

These meant production of certain goods and services, such as building materials and semiconductor chips, fell.

Manufacturing bosses raised their prices to protect their profits, or even to boost them by taking advantage of the reduced supply.

The bosses who buy these materials find that the increased costs eat into their own profits.

So they raise their prices to make up for it. It causes a knock-on effect, where price rises get passed on right down to the goods that ordinary people buy in the shops.

US president Joe Biden tried to stymie this last week by releasing petrol into the market from a government reserve.

The idea is that the increased supply will force bosses to drive prices down again.

Crisis

Biden also accused some energy companies of using the crisis as an excuse to charge ordinary more.

All this tells us is that inflation isn’t to about “excessive” wage rises, or too much money in the system.

It’s to do with the behaviour of businesses and bosses in their relentless drive for profit.

They’ll still try to pass the buck onto us, though. The same mainstream economists, politicians and bankers now talk of heading off a “wage‑price spiral.”

They mean that, as prices rise, ordinary people might demand more wages. They’re especially worried about this in areas with labour shortages.

Higher wages, they say, will eat into bosses’ profits and force them to raise prices even more.

Their alternative is to protect profits by holding wages down.

We’re not to blame for inflation, and we shouldn’t be made to pay for it. The problem is an unplanned system driven by profit. 

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