What Does Inflation Actually Have To Do With Public Sector Pay Rises?

The government claims pay rises increases inflation – but the IMF's research suggests otherwise.
Nursing staff and supporters chant and wave placards as they protest outside University College Hospital during a day of strikes, on January 18, 2023
Nursing staff and supporters chant and wave placards as they protest outside University College Hospital during a day of strikes, on January 18, 2023
Leon Neal via Getty Images

Mass public sector strikes are bringing the country to a standstill as workers continue to call for wage increases.

The government is refusing to match their demands for substantial rises, claiming this would play into a wage-price spiral – a claim unions refute.

Rather than meet the demands over pay, the government has proposed anti-strike legislation which would force a minimum level of service even on protest days.

As this stalemate drags on and more public sectors join in the walkouts, here’s what you need to know.

What is a wage-price spiral?

Back in the 1970s, the government used this phrase as a threat to suggest that raising salaries would only worsen the double-digit inflation.

As the theory goes, higher wages will trickle down, leading to higher costs for the consumer, and more inflation – a vicious cycle.

The IMF (International Monetary Fund) defines it as “an episode were at least three out of four consecutive quarters saw accelerating consumer prices and rising nominal wages”.

What’s happening to inflation and wages right now?

Inflation (how we measure price increases) over the last month was at 10.5%.

This sounds like a lot, but it was actually down from 10.7% in November, having been at a 11.1% peak in October.

It’s still at a 40-year-high though, as food prices, restaurants and hotel prices continue to push the overall rate up.

This is partially due to global factors, such as the widespread easing of Covid restrictions and Russia’s invasion on Ukraine, but also comes down to crises with the UK finances (such as the mini-budget) which meant the pound plummeted in value.

PA Graphics via PA Graphics/Press Association Images

And this slight dip in the inflation rate comes despite new figures showing that wages have been going up.

Private sector pay grew 7.2% in the three months to November, which is the strongest rate in decades – but public sector pay still trails it, at 3.3%.

In real terms, the average wage has declined by 2.6%, according to ONS, when adjusted for inflation. This means the value of our money is still a long way off what it was a year ago.

And so most of the offers from the government over pay increases – such as an extra rise of 4.75% in England, Wales and Northern Ireland for nurses – are still far below inflation.

PA Graphics via PA Graphics/Press Association Images

What do the unions want?

The unions want workers to get a pay rise – along with increased job security – in line with inflation, after years of austerity.

RMT chief Mick Lynch also told Channel 5 News in the summer that it’s the prices which are causing demands for higher wages, which have been stagnant for years.

“Some people haven’t had a rise, not for 10 years since Cameron and Osborne,” he alleged.

He also claimed the government was working to “suppress” wages too, but it was time to “rebalance things” between the billionaires who are profiting and the ordinary workers.

What does the government say?

Robert Jenrick, the immigration minister, claimed on Wednesday that widespread wage increases would worsen the economic problems the UK is currently facing.

He said: “The worst thing that we could do domestically would be to significantly increase public sector pay and then entrench inflation in the British economy and get into a wage spiral.”

He also refused to give nurses pay increases when host Kay Burley suggested it.

The minister went on: “It’s not always as simple as that in life Kay, because what we have to judge is not only how we motivate and respect nurses – and there is a serious challenge with retention and recruitment within the NHS.

“We have to balance that, however, with general affordability to the tax payer, what can the NHS afford.

“Secondly, the point about inflation, which is so critical to everybody in this country, and thirdly how can we handle this in a sensible and appropriate manner.

“The way that’s done is through independent pay review bodies, and there was an independent pay review last year which concluded that nurses should get the pay rise that they have.”

Chancellor Jeremy Hunt has also previously said: “High inflation is a nightmare for family budgets, destroys business investment and leads to strike action, so however tough, we need to stick to our plan to bring it down.”

Former chief secretary to the Treasury, Simon Clarke, said in the summer (when the strikes began) that workers must show “collective, society wide responsibility” to forestall the “evil of inflation”.

Is the government right?

Well, there’s not much evidence supporting its argument.

The IMF shared a paper in November which found only a small minority of “wage-price spiral” episodes were “followed by sustained acceleration in wages and prices”.

It claimed: “Inflation and nominal wage growth tended to stabilise, leaving real wage growth broadly unchanged.”

In fact, the IMF even suggested that “falling real wages and tightening labour markets” are usually followed by declining inflation and nominal wage growth.

“We conclude that an acceleration of nominal wages should not necessarily be seen as a sign that a wage-price spiral is taking hold.”

Economist and commentator Grace Blakeley told ITV’s Good Morning Britain last summer when the strikes first started, since the financial crisis of 2008, there was wage stagnation and so calling for an increase now is fair.

Speaking in June, she said: “What they [the strikers] are asking for is just the maintenance of their wages relative to prices in the economy.”

She explained this money should come from the profits of the company, rather than out of the economy.

“Now, we can grant that without triggering a wage/price spiral if you account for the fact that when you’re increasing wages, you then take some money off the top in terms of profit.

“You keep the amount of money, demand on the economy the same, but you’re taking money away from executives and shareholders rather than working people who actually can’t afford to survive.

“There’s now evidence that its profits which are disproportionately driving inflation, rather than wages.”

Meanwhile, Labour’s shadow cabinet minister Lisa Nandy said in November that pay rises are only “unaffordable because of 12 years of Tory government and 44 days in which Liz Truss and Kwasi Kwarteng crashed the economy”.

It’s worth noting that forecasts from the Office for Budget Responsibility also suggests inflation will fall to 4% by the end of this year (although it is then set to turn negative in 2024).


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