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ROSS CLARK
Britain’s soaring inflation is finally being tamed. Don’t let unions drag us back to the 1970s
Inflation is a notoriously difficult phenomenon for central banks to contain
NEWS that inflation remained at four per cent in January will come as a relief, not least because food prices are now falling after two years of sharp rises.
Homebuyers with mortgages should be feeling especially optimistic.
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The fact that the consumer price index did not rise, as many had feared it would, means it is more likely that interest rates will soon be on a gentle downwards path.
But we are not out of the woods yet.
Inflation is a notoriously difficult phenomenon for central banks to contain.
Once it becomes established in people’s minds that prices are going to go up, it tends to become a self-fulfilling prophecy.
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Workers start demanding higher wages, while businesses start pushing up prices in order to cover their rising wage bill, prompting workers to demand even higher pay and so on.
That is why economists often talk about an “inflationary spiral” — where prices and wages chase each other ever upwards.
Indeed, it is rising pay which has been causing the Bank of England its biggest headache over the past few months.
Average earnings have been rising at well above the rate of inflation, with regular pay up by 6.2 per cent in the year to December.
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This would be fine if productivity was rising strongly, too.
But it isn’t.
Chancellor Jeremy Hunt talks about the 4% increase in inflation for December
On the contrary, productivity has been on the slide since the pandemic.
Shockingly, the average worker in the public services is producing no more now than they were when Tony Blair came to power in 1997.
We can’t make ourselves richer as a country by bidding up our pay beyond what is justified by productivity.
Inflation is the correcting mechanism which will always ensure that we can’t get something for nothing.
Jack up wages beyond what is reasonable and, as sure as night follows day, inflation — and higher interest rates — will follow.
But that hasn’t stopped the unions demanding pay rises well above inflation.
The British Medical Association is still holding out for a 35 per cent rise for junior doctors — and has rejected a three per cent rise on top of the eight per cent its members have already received this year.
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Train drivers’ union Aslef is boasting it has won a pay rise of 7.9 per cent for its members in Wales in April followed by another 4.1 per cent rise in December, taking their basic pay to £71,000.
It is still holding out for a similar rise in England.
Train drivers at five companies have just voted for another six months of strikes.
Many homebuyers won’t connect trade union greed with the cost of their mortgage, but they should do.
The minutes of the Bank of England’s Monetary Policy Committee, which decides on the bank’s base rate every month, are full of references to pay pressures.
Trade union greed
That is one of the reasons why two members of the MPC have twice voted for an interest rate rise this year.
The problem with excessive wage demands is that they are catching.
When one group of workers is awarded a fat pay rise, unions representing other groups will start spoiling for pay increases, too.
That is what happened during the Winter of Discontent in 1979 when a pay dispute at the Ford Motor Company rapidly mushroomed into a mass strike involving millions of workers across many industries.
Each pay award added to the pressure on inflation, which peaked at more than 21 per cent a few months later.
That brought down Jim Callaghan’s Labour government, and it took his successor, Margaret Thatcher, a couple of years to bring down sky-high inflation — with a lot of pain inflicted on the economy in the meantime.
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Now that we seem headed for another Labour government, the worry is it could end up happening again.
Keir Starmer and his shadow Chancellor Rachel Reeves might preach fiscal responsibility but the moment they arrive in Downing Street they will be besieged by public sector unions expecting a big payday after the end of what they like to call “Tory austerity”.
Will a Labour government resist?
The pay settlement for Welsh train drivers is a very worrying sign of what could be to come.
Most train services in Wales are now under the control of its Labour government.
That it has agreed to hike train drivers’ pay to £71,000 — putting them well within the best-paid ten per cent of the population — shows a blatant disregard for taxpayers and also for inflation.
Worrying sign
As things stand, the prospects for the UK economy are not looking too bad.
Although it seems we entered a short, shallow recession in the second half of last year there are signs that business confidence is picking up.
But it could all yet go horribly wrong.
The worst we could have now is a profligate government opening the public spending taps and showering the public sector with pay rises without demanding greater productivity in return.
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Starmer and Reeves are insistent that they won’t be that kind of government — assuming they do go on to win the next General Election.
The outlook for inflation and interest rates will be very different if they fail to keep their word.
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