Boris Johnson's wage-price spiral warning branded a myth by economists

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·Political Correspondent, Yahoo News UK
·5-min read
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GLASGOW, SCOTLAND - JUNE 21: Striking rail staff picket outside Central Station on June 21, 2022 in Glasgow, Scotland. The biggest rail strikes in 30 years started on Monday night with trains cancelled across the UK for much of the week. The action is being taken by Network Rail employees plus onboard and station staff working for 13 train operators across England. Thousands of jobs are at risk in maintenance roles and ticket office closures were planned as well as pay freezes during the cost of living crisis, says the RMT union. (Photo by Jeff J Mitchell/Getty Images)
A growing number of publish sector workers are planning strikes over working conditions and pay. (Getty Images)

Boris Johnson's claims that workers asking for pay rises will make inflation worse have been branded a "myth" by economists.

Inflation hit a 40-year high in the 12 months to May, piling pressure on household budgets and tightening the cost of living squeeze.

As prices rise for essentials like food and fuel, the PM has repeatedly urged workers to show "restraint" and avoid asking for more money.

A growing number of public sectors workers are calling for pay rises - with rail workers holding the biggest strikes in a generation last week.

Barristers also went on strike on Monday with BT workers voting for the UK's first-ever call centre strike on Thursday.

Elsewhere postal workers, teachers, and GPs are reported to be considering industrial action, too.

Read more: The poorly paid workers most likely to be denied pay rises

However, the PM has rejected the calls, arguing higher pay could make inflation worse.

“What I would say to you is that, at a time when you've got inflationary pressures in an economy, there's no point in having pay rises that just cause further price rises because that just cancels out the benefit," said Johnson earlier this month.

UK historic inflation rate. See story ECONOMY Inflation. Infographic PA Graphics. An editable version of this graphic is available if required. Please contact graphics@pamediagroup.com.
Inflation is currently at a 40-year high. (PA)
Price rises in past 12 months. See story ECONOMY Inflation. Infographic PA Graphics. An editable version of this graphic is available if required. Please contact graphics@pamediagroup.com.
Food inflation is soaring. (PA)

“I know that people will find that frustrating. But I've got to be realistic with people about where we are. I think - I'm pretty certain of this - that our inflationary pressures will abate over time, and things will start to get better.”

His remarks rely on the wage-price spiral theory - which argues that increasing wages to match rising prices causes people to spend more, which in turn drives up prices even further. Some economists argue this is what contributed to record inflation in the 1970s.

However, other economists disagree with the wage-price theory being applied to the current economic situation.

Read more: Thousands of PwC staff to get 9% pay rise to help with cost of living

Sam Tims, social security economist at the New Economics Foundation (NEF), told Yahoo News UK pay rises at the current time would not drive inflation - and a failure to pay workers more increases the likelihood of a recession.

"The high inflation that we are experiencing now is not due to wages and increasing wages now won’t lead to further inflation," said Tims.

"Supply chain disruption and the war in Ukraine, as well as a weak pound have pushed up prices. Wages have remained relatively stagnant for a decade and annual pay growth actually fell 4.5% in April.

"The government claim that increasing wages will only push up prices more as companies have to increase prices to remain profitable. This isn’t correct. What the data shows is that companies can increase wages and still remain profitable."

Pay growth v inflation. See story ECONOMY Inflation. Infographic PA Graphics. An editable version of this graphic is available if required. Please contact graphics@pamediagroup.com.
Inflation is rapidly outstripping pay rises. (PA)

He added: "Consumer confidence is very low. If wages continue to fall behind inflation then the likelihood of a recession grows.

"That’s not good for company profits, but it’s far worse for individuals."

NEF chief executive Miatta Fahnbulleh has also described the wage-price spiral argument as a "myth".

"Wages have been stagnant for over a decade and for many key workers, have been falling in real terms," said Fahnbulleh last week.

"Asking for a pay rise in the face of the biggest squeeze in living standards since 1950s, makes complete sense. The wage-price spiral is a myth.

"The labour market today is completely different to how it has been in the past, and we are in the middle of a cost-of-living crisis."

Read more: The simple chart that shows why your money isn't going as far

Paul Johnson, director of the Institute for Fiscal Studies (IFS), has warned that wages and inflation are an increasingly complex situation.

“The case for pay offers [in the public sector] at or close to present inflation levels is strong,” said Johnson.

“Public sector workers have done (even) worse than those in the private sector both over the past decade and over the past two years.”

However, he added: "The case against is equally compelling…

"Big pay rises will mean a cut in workforce numbers and an acceptance that governmental priorities will need to be put on the back burner, or the chancellor being willing to accept higher spending and borrowing, pumping more money into an already highly inflationary environment.”

Governor of the Bank of England Andrew Bailey during the Bank of England Monetary Policy Report Press Conference at the Bank of England, London, following the decision on interest rates. Picture date: Thursday May 5, 2022.
Bank of England governor Andrew Bailey has said workers should avoid asking for large pay rises to prevent inflation rising further. (PA)

It comes after Bank of England governor Andrew Bailey warned workers against asking for big pay rises last month - saying he himself will not be accepting one on top of his £575,000 salary.

“I do think people, particularly people who are on higher earnings, should think and reflect on asking for high wage increases," said Bank of England governor, Andrew Bailey.

“It’s a societal question. But I am not preaching about this. I was asked if I have taken a pay rise myself this year and I said no, I had asked the Bank not to give me one, because I felt that was the right thing for me personally."

The bleak financial situation comes as the UK is projected to have the worst economic growth in the G7, and economists warn the country is likely to enter a recession by the end of the year.

Watch: UK inflation hits 40-year record, highest in G7

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