Workers are not to blame for cost-of-living crisis

Still enduring the longest pay crisis for two centuries, workers now face the steepest inflation for 40 years. But rather than acting to reduce the impacts of these pressures on people’s living standards, the government has been quick to suggest pay needs to be further restrained, and even to blame working people for interest rate rises. 

Inflation has not been driven by pay, it was driven by energy and commodity price shocks overseas.  While wages have responded as workers sought to protect themselves, they are not driving price hikes.  

But even though inflation originated in costs on international markets, government has focused on measures that seek to reduce demand in the economy. The Bank of England’s response, strongly supported by the government, has been to hike rapidly interest rates from 0.1 to 5.25 per cent. This approach hits some groups far harder than others. While costs have rocketed for households with unsecured debt, renting properties or with outstanding mortgage payments, and businesses who have been relying on credit, bank and energy company profits, city bonuses and salaries for certain professional and business services have soared.  

As well as leaving some people unable to protect themselves from substantial hikes in their living costs, this distributional inequality also brings the effectiveness of the approach into question. It is far from clear that rate rises will have the desired effect, at least not without triggering a substantial recession.  

If this happens, those with less will be hit harder – with the loss of salary that comes with the loss of work more difficult to bear. The Bank of England and others have judged recession less likely, but previous forecasts may simply have been premature.   

Government is also failing to act. Under previous periods of government-led austerity, the Bank were required to support the economy while the government operated to depress activity.  But now, the Government are both supporting the Bank’s monetary policy led contraction at the same time as failing to intervene to support those in most need and support growth.  

Immediately the government should be acting proactively to protect workers and support the economy: the energy cap should operate more effectively so that cost falls feed quickly into the economy, social security should be strengthened and public sector workers properly compensated. The IMF has gone so far as suggesting inflation targets might be suspended. 1

But overall, we need a different approach, with rewarding work not wealth delivering a virtuous circle of stronger and shared growth. We know that higher salaries, reduced debt and stronger production support sustainable growth in jobs and living standards, and that this is the change working people need.2  

This monitor highlights new statistics and analysis, illustrating the scale of growing inequalities, the detrimental impacts of the government's current approach and the need to secure a better way forward. Key findings include:  

• The second consecutive year for record city bonuses 
• The highest pay growth coming in the best paid industries  
• Profits in the financial sector up 25 per cent on before the pandemic, and big gains at individual banks 
• Labour income accounting for a lower share of whole economy inflation than in other episodes of inflation, both over time and across countries.  
• The threat of recession, with employment falling for 11 of 20 industries according to the real time jobs data. 

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• 1 ‘“We are not there yet, but that is a possibility,” Gopinath told the Financial Times before her speech. “In that environment is when you could see central banks adjusting their reaction function and saying ‘OK, maybe we tolerate inflation being higher for some more time.’”: https://www.ft.com/content/7d3276bb-8ef8-444c-8356-2792a6f58a24