Faced with a shrinking pool of labour, the private sector – not known for its unionised workforces – increased wages by around six per cent a year to attract candidates.
This was not inflationary on its own. Private sector workers were not striking and their higher wages bill could be absorbed by slimmer profit margins. However, tight labour markets might yet mean central banks have to impose higher-than-expected interest rates in order to create the unemployment they believe necessary to get inflation down to two percent.
Crude, isn’t it?
Inflation hurts almost everyone. Although there may not be a classic wage-price spiral, higher wages could give the green light to companies to carry on price gouging. And that would be bad for almost everyone – think higher prices, higher interest rates, higher mortgage rates etc. This is what needs to be nipped in the bud – by government and by consumers.
If you wondered why the government delays meeting the unions it is because every month deferred means inflation should be lower. This makes initial wage demands look increasingly unreasonable and final settlements more affordable. It appears to be working. Government can also reduce overheating by raising taxes or imposing windfall taxes, just as they can cushioning the hit to real wages with energy subsidies.
How can consumers do their bit? Profiteering is not going on all along the supply chain (eg farmgate milk prices remain broadly flat) – just at the end, but profit-led inflation requires customers to believe stories that are not strictly true, so that they are more likely to accept profiteering as being fair.
This is the time for the media to re-start the Rip Off Britain campaign, so customers become less willing to accept price gouging and help break the vicious cycle.
You do not have to be like Howard ‘I’m as mad as hell’ Beale in the film Network.
Next time you are shopping, politely tell the customer service desk that the fresh produce they increasingly do not have on their shelves is still too expensive.
Please complain; every little helps. Company bosses may begin to wonder whether the short-term gain of pushing up profit margins is worth the long-term risk of customers feeling rip-off resentment or even abandoning them entirely and damaging the reputation of their brand.
Inflation is fundamentally the result of the conflict between firms, workers and taxpayers.
It stops only when the various players are forced to accept the outcome.
The final adjudicator is likely to be a central bank obliged to clobber the economy, forcing workers to accept lower wages in relation to prices and firms to accept lower prices in relation to wages. Ideally everyone should take a share of the pain, but human nature is not like that. Ask a train driver or a chief executive loaded with share options.
