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Industrial unrest continues: prices keep rising

Industrial unrest continues. The railways have been disrupted for the best part of half a year. There is trouble in the NHS. I wonder how much of this is related to the fact that an increasing proportion of the work force is now close to, or already in, the higher rate income tax band? This applies particularly to the railways. At these pay levels, not much of any pay increase increase is reflected in the real purchasing power of the employee’s net wages. The pay increase is a hefty extra cost for the employer but leaves the employees able to buy little more with what they get. With the general increases in prices, they might still be suffering a drop in real wages compared to a few years ago.

It all creates fertile territory for the peddling of economic fallacies such as the notion that inflation is caused by employers paying their employees too much money, as well as opportunities for mischievous union leaders intent on causing chaos and disruption in pursuit of thier own objectives.

It is important to stay focussed. Inflation is the increase in money supply; the generalised price rises are an effect of the inflation, which has unfortunately changed its meaning, thereby spreading confusion about the subject.

Successive governments have set this up. Firstly came a decade of Quantitative Easing, and then came the Covid helicopter money. We should not forget that for the past decade, inflation, misleadingly defined as a rise in the retail price index (RPI), was a policy objective of the Bank of England, though to the frustration of those driving the policy, the RPI remained obstinately stable. The hoped for price increases mostly turned up in the land price bubble, also misleadingly labelled as a house price bubble, and not recorded in the RPI statistics. Keeping this in mind, we can see that the present round of price rises was largely intentional. In the end, the unmet annual inflation “target” which had been building up for years, has come all at once.

In this connection it is also important to remember that this is not a world-wide phenomenon to be blamed on the Ukraine war or anything else. Governments are responsible. Throughout the world, most of them have been doing the same thing. In countries whose governments have not, such as Switzerland, prices have grown at a modest rate of 3%.

One of the causes is that the nature of money itself has been forgotten. Money is created by governments when they spend it into the economy to pay for their activities. This money should then be withdrawn through the tax system, so as to complete the cycle. When this is not possible due to the damaging effects of the tax system itself, the quantity of money in circulation just keeps on growing, which is the true definition of “inflation”. If the growth in the money supply outruns the supply of wealth created in the economy, prices will go up and we experience  what is wrongly called “inflation”.