Do Wage Rises Cause Inflation ?
By Raphie De Santos
AS workers in Scotland and the rest of the developed economies face significantly rising inflation for the first time in nearly a decade we are hearing the usual cry in such situations from the our governments. Alex Salmond was the latest last week to join the chorus of “pay rises will cause inflation”.
But workers as ever are purely reacting to inflation by asking for more
pay to protect their already declining standard of living which for many
is simply the ability to provide a heated roof over their head and food
for them and their families.
Inflation is a permanent feature of post-second world war modern capitalism after 1945. Its creators are the central banks - essentially the governments’ banks and the governments themselves.
They created and continue to create credit and the regulatory environment
to be able to easily sell this credit. This credit is in the form of
hire purchase agreements, loans, credit cards, mortgages and re-mortgages
and secured loans on property.
This reached a peak in the last few years after the United States central bank lowered borrowing rates to below 2 per cent at the turn of the Millennium.
The UK followed suit with the lowest interest rates for decades. These
lower borrowing rates resulted in a further boom of credit lending leading
to the sub-prime credit crunch in August 2007 one of whose consequences
is the global economic recession that we are currently just entering.
Creating credit and the legal environment to facilitate it was designed as a tool to avoid or lessen the depth of recessions by increasing demand to avoid unsold goods being stored in warehouses.
But this credit eventually creates an over demand for goods and this pushes prices up as capitalists are almost immediately able to realise their profits and turn these into fresh capital investments.
They are not able to keep up with this excess extra demand and eventually there are shortages of goods and this leads to an increase in prices or inflation. This has been a permanent feature of modern post Second World War capitalism.
This is at the core of the rising inflation that we have seen over the
last two years. In addition to this permanent structural inflation we
have food and natural resource inflation.
Food inflation had been caused by crops being affected by extreme weather
from climate change, converting food stuffs into bio-fuels and increasing
demand for western foods from an increasingly enriched section of the
Chinese population.
Similarly natural resources have had their supply disrupted by local
and regional conflicts while demand has increased from China, India and
Brazil as these countries modernise their infrastructures and increases
their industrial production.
These natural resources have also seen their prices rise as they become
long-term investment assets and assets for speculation. Some of this
is being driven from the perception of the increased long-term demand
from China and the fact there are finite reserves of these assets particularly
oil.
These increased natural resource prices are feeding through into higher
producer prices.
These are the factors driving inflation not the demand by workers for
wage increases so that they can have a basic standard of living. Governments
here in Scotland and around the world want to protect the large corporations
profits and avoid introducing progressive local tax regimes to raise
sufficient money to pay for local services.
The Scottish Socialist Party stands with those workers wanting to protect
their living standards and lays the blame for inflation firmly where
it belongs with the central bankers and governments of the major capitalist
countries.
The fact is that with inflation running at 5 percent and the marginal tax on low/medium paid income at 30 per cent (basic tax and national insurance contributions), workers need pay rises of over 7 per cent to keep pace with inflation.
¦ Rafi de Santos is an analyst in Fund Management and is a former head of equity derivatives research and strategy at Goldman Sachs International and a former advisor to the Bank of England, London Stock Exchange, London International Financial Futures and Options Exchange and the Italian Ministry of Finance