According to the dwindling flock of doves on the Bank of England's Monetary Policy Committee, current "one-time" price pressures won't translate into sustained inflation because of the shaky state of the economy. Supposedly companies don't have pricing power and trade unions don't have bargaining power. The evidence that this Panglossian view is dead wrong is mounting steadily.
Let's start with corporate pricing power. There's been an ominous increase in producer prices (sometimes referred to as "factory gate prices") for many months. Now there's fresh evidence that prices at the retail level are under increasing upward pressure. UBS's UK economics department has just released a report showing that food prices are rising faster in the UK than in other developed countries: 4.9% in Britain, compared to 3.6% in Germany, 1.8% in the Eurozone as a whole and just 1.5% in the US. UBS baldly states that UK supermarkets are raising food prices by far more than can be justified by the well-reported rise in global commodity prices.
UBS's main purpose is to warn of the growing risk of yet another official enquiry into competition in the UK supermarket sector. Obviously there's an important point to be made here: it's striking that food price rises are so much slower in both Germany and the US, both of which have stronger economies than the UK at the moment. However, the inflation implications of the findings are surely worth considering as well. After all, the supermarkets would hardly be pushing prices up so enthusiastically if they didn't believe that they had the pricing power to make the increases stick, which casts serious doubt on the proposition that one-time price pressures will not become embedded in the economy.
So, supermarkets are raising prices, fuel costs are still rising, VAT has gone up to 20% and local governments are busy raising fees for everything in sight to make up for the reduction in transfers from the central government. Still, with unemployment rising, there's nothing to fear from the unions, right? Well, at the start of this week train drivers at Arriva Trains Wales staged a two-day strike in support of a pay claim. They are rejecting a 12%(!) increase over two years, which would take their pay to £39,000 a year for a normal 4-day working week. That's about 50% higher than UK average earnings, but the union claims that drivers in England are paid more than those in Wales. (This is just one more of the many ways that the disastrous privatization of the railways has boosted their operating costs, but that's a separate story).
It would be naive to assume that Arriva, who are allowed to increase fares in line with inflation each year, won't grant the drivers an increase well above current CPI. It would be beyond naive to think that there aren't many other groups of unionised workers who will assess that they have just as much bargaining power, and are facing just as much pressure on their standard of living, and will resort to industrial action to get what they want. It's hard to blame them, as long as the Bank of England, with the tacit approval of the government, continues to signal that it is not taking seriously the myriad inflationary threats that the economy is now facing.
The problem is, of course, that not everyone has a union to fight their battles for them. Inflation will bear hardest on those on fixed incomes and those in the private sector who are not unionised. It would be wrong to assume that unions (or supermarkets for that matter) will moderate their demands in recognition of the plight of those groups. It's increasingly untenable for the Bank of England to act as if it believes that they will.
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