It’s not pay claims that are driving up prices in Britain. It’s profits
Is inflation the fault of the workers? Striking nurses and rail staff could be forgiven for starting to believe that rising prices can be blamed on their demands for pay. Jeremy Hunt said as much last week, as did the governor of the Bank of England, Andrew Bailey.
By the same token, warehouse workers distributing goods for Aldi, who received a 10% annual pay rise, and East Midlands airport security staff, who secured a whopping overall 17% increase this year, must also be to blame. If wages account for about 70% of a business’s expenses on average, then it must be true that bumper wage increases are the enemy of those who seek to bring down inflation.
The chancellor said he couldn’t revisit pay review decisions for public sector workers without risking a knock-on effect from higher wages to higher prices. In Threadneedle Street, Bailey justified an increase in the base rate to 3.5% with a swipe at workers who bid up their wages.
The governor and a majority of his colleagues on the Bank’s monetary policy committee believe the Aldi and East Midlands airport deals are the tip of a large iceberg. The implication is that wage restraint would take the steam out of inflation and allow the Bank to freeze interest rates, or even lower them, next year.
A question that bedevils the debate about inflation is this: how do official figures showing wage rises averaging 6% – well below the 10.7% consumer prices index – tally with Bailey’s narrative? How does pay settlement data, which tracks the big deals offered this year by major employers across the public and private sectors, reveal a trigger for runaway prices when it shows those deals average just 4%?
The answer may be found elsewhere. It may be that wily corporations have spotted a chance to jack up prices by more than their own costs have increased, knowing consumers have come to expect a supersonic rise in shopping bills.
Paul Donovan, chief economist at UBS Global Wealth Management, has analysed the situation in America, where more detailed information about the corporate sector is available. He examined the rise in wage costs across the hotel sector, adjusted for productivity since the end of 2019, and found it was between 5% and 6%. Restaurant and hotel prices had risen 16%.
Donovan found hotel operators were using fewer staff to improve productivity, limiting the impact of wage rises. This rise in efficiency was being channelled to shareholders, not consumers, who were fed a story that prices needed to rise to cope with rising wage bills.
More broadly, corporations in the US made quarterly profits of almost $3tn in the three months to the end of September, up from $2.4tn two years earlier and an average $2tn in the eight years before the pandemic.
Analysis by the Unite union of Britain’s largest 350 companies revealed a similar trend – profit margins were 73% higher in 2021 than 2019. “Even though sales were down in 2021, profits still rocketed,” said the union’s general secretary, Sharon Graham. “Even removing energy companies from the tally, average profit margins still jumped an astonishing 52%.”
These figures underpin soaring executive pay last year and this, and the return of the bumper City bonus. More fundamentally, it suggests that Hunt and Bailey – the two most senior policymakers in this area – misunderstand business dynamics and how firms are taking advantage of a crisis to ramp up prices.
Official data reveals hotel prices are one of the main drivers of UK inflation, so the price-gouging popular in the US may have been replicated across the British hotel sector.
There are hundreds of products in the shops that have benefited from falling shipping costs, lower raw materials costs and labour costs that are not dissimilar to those today, yet prices continue to climb.
The only visible sign of falls being passed on is at the petrol pumps – and even there the price is higher than would be expected when a recession across the industrialised world signals a big fall in demand.
Donovan says the “rip-off Britain” campaign, which challenged rocketing prices after the 2008 financial crash, needs to be dusted off and given a new airing.
Business leaders could argue that profit warnings are on the rise. But according to data collected by consultancy EY, the worst affected are smaller retailers and consumer-facing companies, which are adjusting to the trend for working from home and a decline in consumer spending as much as they are to wage demands from their workers.
Hunt and Bailey should take note. The government can judge what it can afford to pay to fund public sector wage demands, but they shouldn’t use inflation as an excuse. The evidence is not on their side.