A Transitory Inflation?               

Martin Seale

The price of many of the goods that the typical consumer buys is higher than it was a year ago. Is this inflation?  The last time we had inflation in the UK was in the 70s and 80s.  But is what happened then similar to what is happening now?

In the early 70s there were dramatic increases in the prices of oil and gas.  These increases meant that the real incomes of the working class would fall.  The working classes refused to accept this drop in their real incomes.  They demanded and were strong enough to get increases in wages that protected their real wages.  The profits of employers fell.  They were, however, also unwilling to accept this drop in profits and so increased the prices at which they sold their products.

Workers perceived these price increases as another reduction of their real wages and demanded further wage increases.  Britain became involved in a wage-price spiral with increasing inflation as workers and employers fought over how the reduction in incomes triggered by the initial increase in energy prices would be distributed between workers and capitalists.

The inflationary spiral was caused by the struggle over distribution and not by the initial increase in the price of energy.  The latter caused a change in the price level which turned into an inflationary because the participants in the distributional struggle were both strong.

In 2022, in post pandemic Britain, there has also been an increase in prices, particularly energy prices.  Is this increase in prices transitory or the start of an inflation like that experienced in the 1970s and 1980s?  That remains to be seen but the evidence so far suggests that it is more likely to be transitory.

It is transitory because the increase in prices is largely caused by supply problems created by the pandemic and, now, the war in Ukraine.  During the pandemic consumers switched from buying services to buying tangible products.  Demand for products went up at a time when maintaining production at pre-pandemic levels was difficult because of sick workers and a disruption in shipping goods from various parts of the world.  But as this situation eases prices of many goods should revert to pre-pandemic levels.  

The decision by the Bank of England to increase interest rates is probably not helpful.  It is true that it will reduce the willingness of people to borrow to finance consumption.  But the main problems that need to be dealt are supply problems.  An increased interest rate will actually hinder attempts by businesses to rectify these supply problems.

Could the inflation that is currently transitory become more permanent?  That’s unlikely.  To become permanent, workers would have to fight to protect their real wages.  Some of the more powerful groups of workers may engage in such a fight.  But the vast majority will not feel that they are in a position to engage with the owners of capital on how the drop in living standards caused by inflation should be shared between Labour and Capital.  

It is unlikely, therefore, that there will be a return to the wage-price spiral inflation that was experienced in the 1970s when workers felt they were strong enough to launch struggles to protect their real standard of living.  In the 70s and 80s in Britain over 50% of the workforce were unionised.  Today only some 10% are unionised.  There are a number of reasons why union membership has declined.  Anti-trade union legislation has made it difficult for unions to organise.  The nature of work has also changed from large scale manufacturing plants to small scale service industry employment.  

Whatever the reason, the drop in union membership means that workers are in a weak position to defend their standards of living in the face of price increases.  We fully expect that workers will suffer a fall in their living standards until supply problems caused by the pandemic and war in Ukraine are resolved.