But does it hold up to reality? We asked economists – and they’re not convinced.
What’s driving inflation?
As a recap, inflation is a measure of rising prices. High inflation means prices are rising quickly.
It’s linked to the idea of supply and demand – if there’s a lot of demand, prices will rise.
But the current driver of the UK’s inflation is the high price of food and fuel, as anybody who has set foot in a supermarket or checked an energy bill recently will be aware of.
These are driving a perilous situation for the UK economy. Inflation for December 2022 was 10.5 per cent, meaning prices were 10.5 per cent higher than in December 2021. This was a slight decrease from 10.7 per cent in November. These figures are the highest they have been for nearly 40 years.
The Bank of England has predicted that this will fall from the middle of this year, while the government has pledged to cut inflation in half.
What does the government say about pay rises and inflation?
As hundreds of thousands of workers take to the streets, the government has urged caution. Pay rises would keep inflation high, Jeremy Hunt has warned.
It’s a line repeated by other ministers. Immigration minister Robert Jenrick said meeting pay demands would be “the worst thing that we could do.”
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So do the claims on pay rises fuelling inflation actually hold up?
Economists have cast doubt on the idea, especially in the UK’s current economic climate.
Henry Parkes, senior economist at IPPR, said the government had offered “very little by way of explanation” as to how pay rises would drive inflation. Higher wages can push prices up by increasing demand, but public sector pay rises would only affect one in five workers, Parkes added.
He told The Big Issue: “Inflation is largely being driven by soaring energy prices and the fallout from Covid, and so rather than suppressing wages for hard working families keeping the country going, the government would be wiser to focus on profit restraint for companies making billions out of this crisis. A bigger risk is that the squeeze on household incomes is going to push the economy into a recession.
“It’s right that higher wages can increase demand and so have some inflationary pressure, but the rises only affect one in five workers. Furthermore, in other areas demand is actively being sucked out of the economy through the highest interest rates since 2004, whilst the Bank of England found that investment intentions are plummeting.”
Pay rises would not outstrip productivity improvements, and are lower than existing pay rises in the private sector, meaning they’d contribute little to inflation, said Hannah Slaughter, senior economist at the Resolution Foundation. “The actual problem the government is worried about is how to pay for higher pay settlements, balanced against needing to fill damaging staff shortages across the public sector,” she said.
In fact, pay rises would simply mean people were able to pay existing prices, which are being set abroad, said economist James Meadway.
“The claim that pay rises would be ‘inflationary’ is laughable. At a time when pay, in real terms is falling rapidly all a rise will do is compensate people for high prices. And those high prices are coming from very rapid increases in the price of energy and food, imported from elsewhere in the world,” Meadway told The Big Issue.
Adding that the UK’s looming recession is fuelled by a lack of spending, Meadway said: ”Paying nurses in Britain less doesn’t suddenly mean Qatar charges us less for natural gas to compensate – this isn’t how the economy works.”
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Is the wage-price spiral real?
In more general terms, fears about pay rises fuelling inflation are founded on a piece of theory known as “wage-price spirals” – a phenomenon where wages and prices increase together.
However, a study by the IMF in November 2022 cast major doubt on these events.
“Perhaps surprisingly, only a small minority of such episodes were followed by sustained acceleration in wages and prices. Instead, inflation and nominal wage growth tended to stabilise, leaving real wage growth broadly unchanged,” the study found.
In other words, increasing wages does not necessarily make inflation worse. Or, as it put it: “An acceleration of nominal wages should not necessarily be seen as a sign that a wage-price spiral is taking hold.”
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