The Bank of England has increased its main interest rate to 1 percent. It is forecasting inflation of 10 percent this year, driven by soaring energy costs and the rising price of goods. Millions of people are facing a miserable, grinding year as the prices of essentials accelerate far past pay, pensions, or benefits increases. Interest rate rises will do nothing to alter this; more likely, they will simply add to the squeeze of those already in debt — levels of which have also started to rise sharply since the start of the year. And as prices and interest payments rise, spending outside of essentials will fall further, helping tip the economy into a recession.
For some, this will mean being pushed into outright poverty, with the Resolution Foundation think tank forecasting 1.3 million more people forced into absolute poverty over the next twelve months. Reports are already coming in of pensioners skipping meals to cover their heating costs. For those above the poverty line, it will mean a year or more of never quite having enough money — of clawing back on spending outside of the essentials. The summer may provide some respite, as the warm weather reduces the need to heat houses. But by autumn, as the cold weather comes in, and with a forecast £830 rise in average energy bills expected, the situation will be bleak — “horrific,” in the words of Scottish Power’s chief executive.
What beggars belief is that the rate setters at the Bank of England know interest rate rises are not going to work. The inflation we are seeing now is driven by two factors, neither of which will be affected by interest rate rises. One of these was pointed out by Bank of England governor Andrew Bailey in a speech in September last year. He said that an interest rate rise “will not increase the supply of semi-conductor chips, it will not increase the amount of wind . . . and nor will it produce more HGV drivers.”
He was right. With COVID still disrupting the production and transportation of goods across the world, with extreme weather hitting food and even semiconductor production, and now with the Russian invasion of Ukraine severely disrupting the supply of global wheat, grain, cooking oil, and other raw materials, prices are being pushed up by big, global factors. Changing interest rates in Britain will do nothing to alter this. Bailey even went on to admit, in the same speech, that rising interest rates could “make things worse . . . by putting more downward pressure on a weakening recovery of the economy” — in other words, push us into a recession.
But there’s another factor at play, which neither Bailey nor the other mainstream economists care to address too often. Profits, since the first wave of COVID lockdowns, have skyrocketed, even as wages have not. There is a logic to this: if prices have risen, but most people’s incomes have not, then someone else must be making more money. And if you look at how oil and gas companies like Shell and BP have profiteered from rising prices, it’s obvious who is making this money. Looking further back, since 2008, the most profitable firms have increased their markup — the addition to costs charged by companies and taken as their profit — from 58 percent to 82 percent. Early evidence from the United States shows markups skyrocketing as COVID hit.
So if you want to address inflation, the most sensible place to start would be to squeeze profits. This could be done directly through legally controlling the prices of essential goods, like gas for heating homes. Or it could be done more generally, by increasing the wages people are paid. Either route — or both together — gets you to the same point: shifting more money into the hands of those who work, and less into the hands of those who profit from that work.
This is what happened last time Britain suffered from sustained, high rates of inflation. Inflation averaged 12 percent a year in the 1970s — which sounds disastrous, until you realize that average wages increased 15 percent every year. It was union strength that acted as a defense against excessive price rises. Living standards, as measured by wages compared to prices, improved far more in the 1970s than they have in the nearly fifteen years since the 2008 crisis. It’s bad to have such high inflation. But if it’s there anyway — as it will be today — it’s better to have working people able to defend themselves.
Conventional economics typically gets the emphasis the wrong way round, panicking about high wages producing high prices. The reality is that if prices are rising, wages should be rising faster to compensate. This is what happened in the 1970s.
The result back then was a serious squeeze on company profits, which fell to record lows during the decade, spurring on the ferocious reaction against “excessive” union power. This culminated in the series of major defeats Margaret Thatcher’s government inflicted on the movement. The miners’ strike, over 1984–85, is today the best known of these, but other previously well-organized sections of workers were broken: among them, steelworkers in 1980, print workers in 1986, and dockers in 1989.
Backed up by a legal assault on long-established trade union rights, from bans on solidarity action to the bureaucratic absurdities of the strike ballot process, union organization was hammered. Strikes, which remained frequent throughout the ’80s, fell off a cliff in the early 1990s and have never recovered. Union membership fell from more than half of all employees in 1979 to 23 percent at its 2017 low point. Collective bargaining, where all employees at site have a joint agreement on pay and conditions with management, declined even more, from 71 percent coverage in 1979 to 21 percent today — and that, as with union membership, is mostly in the public sector.
This background is fundamental to understanding the economy today. When economists and the occasional politician worry about the so-called wage-price spiral, they are fantasizing about a world in which strong unions demand high wages and so force poor capitalists to put up prices. If this world ever really existed, it was brought to an end at least three decades ago. Price rises today are not driven by wage rises; there is at present no relationship between products seeing high price rises and industries seeing higher wage rises. Instead, rebuilding union organization to tackle high prices is essential.
It won’t, however, be enough. We have to look beyond those employed, especially today, with far more people either only in part-time work, out of work entirely, or receiving a pension. Payments from government, whether to public-sector workers or pensioners or benefits claimants, also need to increase by at least the rate of inflation. As a result of higher prices, the government has had £23 billion more in taxes come in over the last three months than it expected. This windfall should be used to compensate all those it pays money to, whether public-sector workers, pensioners, or those on benefits.
Nor will rebuilding union organization happen overnight. Building a union on the ground, as anyone who has tried to do it knows, is a long, slow, difficult process. Victories and successes can help spur membership along, as we’re starting to see particularly in the US. But we are a long way from the kind of powerful union movement that could take on the profiteers. And the inflation crisis needs an immediate response.
Instead, we need a political movement making immediate demands on government. In France, the gilets jaunes had the right idea — protesting initially against rises in gas taxes in late 2018, then extending this into wider demands for action on living standards. The government could and should scrap the expected £830 gas bill increase, due in October. It could lift the minimum wage by far more than expected inflation, and do the same for pensions, benefits, and public-sector pay.
We need to find demands that unite the broadest possible coalition against price rises and for higher incomes. The People’s Assembly slogans — WAGES UP, BILLS DOWN — are the right ones to raise. And the Trades Union Congress demonstration in London on June 18 is the first step on the way to building a movement that can carry them.