Inflation: rising prices and the 2% pay ceiling

If the government were to announce that it was cutting the wages of all workers - public and private sector - there would presumably be uproar. And yet this is exactly what they have done by calling for ‘pay restraint’ and insisting all wage rises are capped at 2%. Make no mistake, a sub-inflation pay ‘rise’ is a pay cut. No amount of statistical trickery changes this simple fact.

The government’s own favoured measure of inflation, the Consumer Price Index (CPI) is currently running around 3.3%. However, this measure excludes mortgage repayments. Does that mean we don’t have to pay them back out of our falling wages? No such luck. The inflation measure that does include these payments is called the Retail Price Index (RPI). It is currently running at around 4.3%. So by the government’s own figures they are imposing a pay cut of over 2%.

However, the official figures don’t tell the whole story. Inflation is calculated by taking the average prices of a ‘typical basket of goods,’ including items from literally bread and butter through to digital radios and flat screen TVs. However, if prices of essentials are rising while prices of gadgets are falling – which they are at the moment, we simply spend more on essentials and less on luxuries, and our standard of living falls even though overall prices may appear quite stable. An attempt by The Telegraph to calculate a ‘Real Cost of Living Index’ (RCLI) taking into account rocketing food and energy costs puts cost of living inflation at 9.5%.

Of course, inflation is already being blamed on ‘greedy’ workers demanding they maintain – or heaven forbid improve! – their standards of living. This is despite the government and unions succeeding in holding down public sector pay claims last year (see Tea Break), and wages in the economy as a whole frequently failing to keep up with inflation over the past decade.

There is an irony here. Gordon Brown built his ‘prudent’ reputation by keeping wages down – and therefore profits up – while the economy grew. But a growing economy requires growing consumption. How are we to consume more if our wages aren’t keeping up? The ‘answer’ was cheap credit for all to plug the gap; essentially a pyramid scheme reliant on rising house prices. The government and employers were having their cake and eating it, while we got geared up to our eyeballs in credit card debt.

But now that the housing market has begun to fall and credit is beginning to dry up, their attempt to cheat at their own game has faltered and they’ve gone on the attack. But not daring to do this openly, they try to hide behind statistics and let inflation do their dirty work. Ultimately however, behind all the talk of the ‘credit crunch’ and rising oil prices, inflation is just the latest means being used to pursue a familiar end – employers always want us to do as much work as possible for as little pay as they can get away with (just consider unpaid overtime, understaffing, increasing workloads...).Therefore the only way to fight the current pay cuts is to fight for our own interests against theirs; regardless of the state of the economy our standard of living is only ever as low as we let them push it or as high as we can win through collective action.

Written for the Tea Break bulletin in July 2008.