If we concede to the unions, Britain will find itself in a dizzying wage-price spiral

A wage price spiral. We have not experienced one for so long that for most people the phrase might just as well be written in the Old English of a thousand years ago.  It is, well, sort of comprehensible but only just.

But such spirals can take hold with terrifying swiftness.

Towards the end of 1973, inflation was around 8 per cent. The figure felt less disturbing then than it does now, after we have experienced several decades of near-zero inflation. The early 1970s had seen a major commodity price boom, pushing up inflation everywhere. In Germany, a country with a longstanding fear of inflation, prices were rising at an annual rate of 4 per cent.

Eighteen months later, by the middle of 1975, inflation in the UK was well over 20 per cent. It was moderated by rising unemployment in the second half of the decade, and even more by the massive recession of the early 1980s with unemployment reaching over 3 million. But it took a further decade for inflation to be really squeezed out of the system.

The trigger for the dramatic acceleration in inflation during 1974 was a sharp increase in world energy prices in the winter of 1973/74. The potential parallels to the world of today are obvious.

Inflation rose across the West as a whole. But the similarities between countries soon ended. By the end of 1975, inflation was back down to 4 per cent in Germany and was still some 20 per cent in the UK.

The key difference was that organised labour in Germany – both countries were much more heavily unionised than they are now – appreciated that the rise in world energy prices meant that their living standards had to fall. Income had been transferred from countries which used energy to those which produced it. They did not attempt to chase inflation with ever larger wage demands.

In complete contrast, workers in the UK demanded hefty pay rises. Once conceded, these translated into even higher prices by pushing up the costs of production. In turn, this led to even larger pay claims across the economy as a whole. The National Union of Railwaymen famously turned down an offer of 27.5 per cent on the grounds that it was inadequate.

This is what a wage-price spiral looks like. It has a devastating and negative impact on the economy.

We can put this into a much longer historical context. Over the past 150 years, advanced economies such as the US, UK and Germany have only experienced a small number of episodes of high inflation.

Two of these were during the world wars, when the economies were being run at absolutely full tilt and shortages and bottlenecks were everywhere.

The others, such as the 1970s sagas in both Britain and America, have been when there was fierce conflict over the distribution of income. In Germany in the early 1920s this got completely out of control and inflation was literally millions of per cent a year.

No one is suggesting anything remotely like the hyperinflation of the Weimar Republic will happen. But it is perfectly plausible to envisage inflation remaining in double figures if a wage price spiral develops.

Unionised workers in the public sector and the former nationalised industries such as rail seem completely unwilling to accept that the energy price rise implies a reduction in real wages.  

It’s not just the Conservative government holding the line on public sector pay demands, but Keir Starmer and the Labour Party as well. If we concede, private sector workers will follow suit, and the wage-price spiral will become the norm.

As published in City AM Wednesday 14th December 2022
Image: Flickr
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