It is not wage claims that are driving up prices in Britain. It’s Profit | Phillip Inman

lIs inflation the fault of the workers? Striking nurses and railway workers could be forgiven for believing that rising prices are due to their wage demands. Jeremy Hunt said so last week, as did Bank of England Governor Andrew Bailey.

Likewise, the warehouse workers distributing goods for Aldi, who received a 10% annual pay rise, and East Midlands airport security staff, who earned a whopping 17% more this year, should also be blamed. If wages average about 70% of a company’s expenses, then it must be true that huge wage increases are the enemy of those who want to curb inflation.

The chancellor said he could not review wage revision decisions for public sector workers without risking higher wages leading to higher prices. In Threadneedle Street, Bailey justified an increase in the base rate to 3.5% with a swipe at workers who offered up their wages.

The governor and a majority of his colleagues on the bank’s monetary policy committee believe the deals with Aldi and East Midlands at the airport are the tip of a big iceberg. The implication is that wage moderation would reduce inflation and allow the Bank to freeze or even cut interest rates next year.

One question that baffles the debate about inflation is this: How do official numbers showing average wage increases of 6% – well below the 10.7% consumer price index – match Bailey’s story? How does payment settlement data, which tracks the big deals offered this year by major employers in the public and private sectors, reveal a trigger for runaway prices when those deals are found to average just 4%?

The answer may be found elsewhere. It may be that crafty companies have seen an opportunity to jack up prices by more than their own costs have risen, knowing that consumers have come to expect a supersonic rise in shopping bills.

Paul Donovan, chief economist at UBS Global Wealth Management, has analyzed the situation in America, where more detailed information on the corporate sector is available. He examined the increase in wage costs across the hotel industry, adjusted for productivity since late 2019, and found it to be between 5% and 6%. Prices of restaurants and hotels had risen by 16%.

Donovan found that hotel operators were using fewer staff to improve productivity, limiting the impact of wage increases. This efficiencies were passed on to shareholders, not consumers, who were given the narrative that prices had to rise to cope with rising labor costs.

More broadly, US companies made quarterly profits of nearly $3 trillion in the three months to the end of September, compared to $2.4 trillion two years earlier and an average of $2 trillion in the eight years before the pandemic.

Analysis by the Unite trade union of Britain’s 350 largest companies revealed a similar trend: profit margins in 2021 were 73% higher than in 2019. “While sales fell in 2021, profits still skyrocketed”, said the union’s general secretary, Sharon Graham. “Even when energy companies are removed from the count, average profit margins are still up by an astonishing 52%.”

These figures are behind last year’s high executive pay and this, as well as the return of the massive City bonus. More fundamentally, it suggests that Hunt and Bailey – the two leading policymakers in the field – are misunderstanding business dynamics and how companies are taking advantage of a crisis to drive up prices.

Official data shows that hotel prices are one of the main drivers of UK inflation, so the price gouging popular in the US may have been carried over into the UK hotel sector.

There are hundreds of products in stores that have benefited from declining shipping costs, lower raw material costs, and labor costs not unlike today’s, but prices continue to rise.

The only visible sign of the downturn being passed on is at gas stations – and even there the price is higher than would be expected when a recession in the industrialized world signals a major drop in demand.

Donovan says the “rip-off Britain” campaign, which challenged skyrocketing prices after the 2008 financial crash, needs to be dusted off and given new impetus.

Business leaders could argue that profit warnings are on the rise. But according to data collected by consultancy EY, the most affected are smaller retailers and consumer-focused companies, which are adjusting just as much to the trend of working from home and a decline in consumer spending as they are to their employees’ wage demands.

Hunt and Bailey should take note. The government can assess what it can afford to pay to fund public sector wage demands, but it should not use inflation as an excuse. The evidence is not on their side.