Inflation is being driven by inequality


For some tie, I have been arguing that inflation is driven by inequality. So I was fascinated to see the report that ‘Salary hikes are a key factor in driving inflation.

That was the headline in the Observer yesterday but – disappointingly – it doesn’t seem to go any further than the great gulf between the top 10 per cent of earners and the bottom 90 per cent.

The figures emerged originally from the Office of National Statistics. Then the TUC analysed the figures and they found that the famous 1 per cent – those earning at least £180,000, were getting paid on average about 7.9 per cent than last year, up from 3.7 per cent in January.

By contrast – you guessed it – people earning around £26,300 saw a big fall on their wage rises this year, from 9.5 per cent to 4.7 per cent in April.

What it doesn’t say is that an unequal society is likely to be an inflationary one. Because when the 1 per ent can afford things or services, then it tends to raise the costs for the rest of us.

You can see that primarily in house price inflation – which has a great deal more to do with the too much money than it has to do with too few goods that it is chasing.

Because people at the top of the economic food chain can afford more, so the prices rise to meet them.

Equally, I know that May’s inflation rate – of 8.7 per cent = was mainly down to a surge in discretionary spending, like restaurants, hotels, entertainment and flights abroad.

How does this affect people’ lives? The answer is that the majority of people in the UK are in a big band in the middle of the graph – let’s call them middle class (see my book Broke for more on the peculiarly sharp middle class crisis).

And most of them have a basket of goods and services they can afford to buy in their income range.

There is bound to be competition around the edge of that sort of basket of goods and services. Get in it, and a brand may be made for life – but it means that something will also have to be ejected.

Then, if one end of the pay spectrum is paid much more than the other – or the bottom end is forced to pay out much more in rent – then those who feel comfortable with their basket in the middle will find themselves increasingly squeezed out – because they can no longer afford what their slightly better off neighbours can afford.

And in this way the middle gets squeezed and the prices rise.

So what can we say to the Bank of England governor Andrew Bailey’s warning that low and middle earners are causing inflation?

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