How to Solve the Cost of Living Crisis? Pay Rises, Now!

Leave interest rates out of it.

by James Meadway

19 November 2021

shopper supermarket
Neil Hall/Reuters

Inflation in the UK has hit a ten-year high, according to official figures released earlier this week. Average prices have risen by 4.2% in the 12 months to September, the Office for National Statistics said. And with some rising far faster than the average rate, most of us will experience a significant squeeze on our living standards. 

With extreme weather and supply shortages increasingly driving these hikes, it would be a serious mistake to try and combat the problem with interest rate rises, as the Bank of England is reported to be considering. In order to effectively tackle this growing crisis, the focus must instead be on increasing benefits and pay.

Averages conceal the scale of the problem. 

Inflation measures the rate of price increases based on a typical ‘basket of goods’ bought over a month by a typical UK household. But working it out this way means that the averaged headline figure can hide very sharp increases in certain items. Gas prices, for example, shot up last month, in the wake of the government’s removal of the ‘cap’ on its price rises, hitting overall inflation hard. Over the entire year, gas prices have risen by 28%, whilst electricity is up 18%.

Because of this, people will feel a real squeeze in their standard of living, particularly since essentials like gas now cost so much more.

That average pay rose by 4.9% in the year from September, just ahead of inflation, obscures this reality, implying that at least some workers are better off in real terms now than they were 12 months ago. 

Some workers have seen big pay increases since the pandemic erupted, with lorry drivers and some hospitality staff receiving significant bumps. Most, however, will have seen low pay rises, had their wage stay the same, or even faced pay cuts. Some people have even been pushed out of work, with “economic inactivity” rising in the last year – hardships that the averaged figure handily conceals.

No, Brexit isn’t to blame. 

Some pundits want to blame rising prices solely on Brexit. But while leaving the EU has had some impact on costs, the fact is inflation is shooting up all across the world, driven by factors that have nothing to do with the UK’s messy departure. 

Used car prices are up as a result of a shortage of semiconductor chips, which is hurting the production of new cars, and thus pushing up demand for second-hand ones. Global food prices have risen as a result of poor harvests – coffee in Brazil, grain in Canada, amongst others. And hanging over all of this is the coronavirus pandemic, which has severely disrupted the supply of goods and services for 18 months. 

There are other theories for this inflation spike. Free market economists claim that increased government spending, or the £550bn of new money created by Quantitative Easing (QE) since coronavirus erupted, are responsible for price rises. But neither of these explanations really work.

The government has massively increased spending over the last 18 months, as the coronavirus pandemic wreaked havoc. But this extra spending has not been responsible for pushing up inflation as spending by households and businesses fell hugely as lockdowns hit – a decline that government spending, in effect, compensated for. 

Meanwhile, the QE money will have worked to push up asset prices – like the price of property – rather than the prices we see in shops.

Climate change is the real cause. 

Today’s price increases are, in fact, driven by something far more ominous: environmental breakdown. 

Take the examples I mentioned earlier: one of the reasons semiconductors are in short supply is because droughts in Taiwan and wildfires in Texas have restricted production at the major factories that produce them. Coffee harvests have been damaged in Brazil on account of unusually heavy frost and drought; meanwhile, in parts of Canada, “the worst drought for 20 years” has led to wildfires that have devastated grain production. Meanwhile, the coronavirus pandemic, which has been uniquely devastating to the global economy, is the worst in a slowly rising tide of new and novel diseases for humanity.

Extreme weather, crop failures and increased disease outbreaks are all credibly linked to climate change. And they are only likely to intensify, especially in light of Cop26’s failure to seriously restrain greenhouse gas emissions. As a result, we should expect higher prices (and recurring shortages) to become a permanent feature in our lives. 

This means that arguably the worst possible policy at this point in time is to increase interest rates, an option that the Bank of England is toying with. 

Indeed, making it harder and more expensive to borrow money will not address supply shortages. Even Andrew Bailey, the governor of the Bank of England agrees, explaining that fiddling with interest rates “will not increase the supply of semiconductor chips, it will not increase the amount of wind… and nor will it produce more HGV drivers”. On the contrary, increasing interest rates “could make things worse in this situation”, he argues, “by putting more downward pressure on a weakening recovery of the economy”. 

Bailey is absolutely right. Pushing up interest rates is the worst possible response to these price rises, hitting households that are already in debt and risking jobs and investment across the economy. 

The alternative is redistribution. 

So how should the British government respond? In the short-term, this squeeze is likely to get worse, and will likely reach a real pinch point in April, as the Tories’ National Insurance Contributions increase kicks in, alongside council tax increases and, potentially, another raising of the gas price cap.

Since these forthcoming policy changes all directly impact UK living standards, halting them would be a smart first step in averting the crisis. Reversing the cruel £20-a-week cut to Universal Credit would also be a wise move.  

The government has the power, for example, to impose tighter controls on prices for crucial items like gas and electricity. British Gas profits have more than doubled in the last year, so there’s enough money out there to cover the cost of the cap. This government could choose to act in the interests of the majority, but (predictably) is actively choosing to make our lives worse.

Pay rises, now!

Beyond reversing cuts and capping the price of essential items, the most obvious way to stop the squeeze on living standards is to pay workers more. After a decade of stagnant or falling pay, the case for pay rises today is overwhelming. A sharp increase in the minimum wage would also be a major help. So, too, would better union organisation. 

Already, we are seeing some workers take advantage of the demand for their labour to win big pay rises – like the lorry drivers in Manchester, who won a 30% pay increase. Unions should be doing everything they can to recruit and encourage big pay demands. 

Afterall, the Tories say they want a ‘high pay’ economy. Funnily enough, that starts with paying workers more – it’s the best possible solution to the inflation we now face.

 James Meadway is an economist and Novara Media columnist.

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