Are wage increases for workers responsible for rising inflation?

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Workers shouldn’t pay inflation

Inflation can leave us feeling helpless. The prices of some of the most common things – food, gasoline, rent – will go up, leaving us all essentially poorer.

It is happening all over the world. There is nothing we have done to cause it, and apparently nothing we can do to prevent it from happening.

You will certainly get this impression from mainstream economists in newspapers, top politicians, and central bank leaders.

They talk about inflation as if it were an independent force of nature – something to do with human behavior, but with a life of its own.

But inflation does not act on its own.

Capitalist competition drives inflation as rival bosses rush to buy materials and thus raise prices.

They try to compensate for this by raising the price of the products they make, which has a ripple effect on ordinary people.

Prices

Where possible, politicians and economists have tried to blame workers’ wages. If wages rise too much, they would say, prices rise to catch up.

But this argument does not hold.

Wages have mostly been kept down or cut over the past decade as part of austerity and they are not rising with inflation now.

Free market law tries to blame state spending and intervention.

They argue that if the supply of money increases more than production, demand will increase more than the supply of goods and services, causing prices to rise.

But that argument doesn’t work either.

One of the ways governments responded to the 2008 financial crash was to create more money and put it into the financial system.

Inflation has remained low or even negative.

So now most mainstream economists have to admit that the global rise in inflation has something to do with how their system works. Or rather, how it is not.

Some explanations attribute at least part of the blame to the increase in “consumer demand”, that is, ordinary people who want to buy things.

But they all accept that the disruption and shutdowns during the pandemic are at the root of the problem.

This means that the production of some goods and services, such as building materials and semiconductor chips, has fallen.

Industrial bosses have increased their prices to protect their profits, or even to boost them by taking advantage of the reduced supply.

Bosses who buy these materials find that rising costs eat away at their own profits.

So they increase their prices to compensate. This causes a ripple effect, where price increases spill over directly into the products that ordinary people buy in stores.

US President Joe Biden tried to prevent this last week by bringing gasoline from a government reserve to the market.

The idea is that the increased supply will force the bosses to lower prices again.

Crisis

Biden also accused some energy companies of using the crisis as an excuse to charge more on the ordinary.

All this tells us is that inflation is not about “excessive” wage increases or too much money in the system.

It is about the behavior of companies and bosses in their relentless pursuit of profit.

They will still try to get the ball back to us. The same traditional economists, politicians and bankers now speak of avoiding a “wage-price spiral”.

They mean that, as prices go up, ordinary people might demand more wages. They are particularly concerned about this in regions with a labor shortage.

Higher wages, they say, will eat away at the bosses’ profits and force them to raise prices even more.

Their alternative is to protect profits by keeping wages low.

We are not responsible for inflation, and we should not be forced to pay it. The problem is an unplanned profit-driven system.

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