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UK Wage Growth lags behind rising living costs


New release data from the ONS shows that the UK’s wage growth has continued to fall behind the rate of inflation as living costs continue to rise within the UK.


The UK inflation rate has been slowly creeping up, the newest figure for December currently stands at 5.4% CPI, an increase from the Novembers figure of 5.1% CPI. This places the UK’s inflation rate well above the government-mandated 2.0% CPI target.


The causes of these higher inflation rates have already been extensively explored by numerous newsagents, rising gas prices, rising international shipping costs and labour shortages all spring to mind when one mentions the current cost of living crisis.


With regards to the gas prices, record demand for gas from the European Area as well as the UK due to surprisingly low output from renewable energy sources as well as a particularly cold winter has increased gas prices.


Yet, one interesting nuance in the data shows that the UK’s gas exports have reached record highs since the start of the pandemic as gas exports doubled to 31,975-gigawatt hours for the three-month period, compared with 15,380 in 2020 and 19,633 in 2019.


This is peculiar as it seems that the UK does not have a gas shortage, but, a shortage of gas storage facilities that are inhibiting the nations ability to store and demand more gas than the European area. As such, similarly to supply, exports will follow to where the money (demand) is, which, in the case of gas, is the European region.


Rising international shipping costs have occurred due to ongoing social distancing restrictions within nations such as China, reducing productivity and output, which, has been yielding cost-push inflation as 27% of the UK’s GDP is allocated to imports, thus making any fluctuations in international shipping costs a factor that likely has heavy contributions towards rising inflation rates, similarly to gas which is used for all business and household operations as it provides electricity.


An honourable mention before we move onto the labour market is the Bank of England’s expansionary monetary policy measures that occurred at the start of the pandemic. Quantitative easing came to a record high of £895 billion and interest rates were cut to a record low of 0.1%, whilst some would argue that this would have directly contributed to rising inflation rates as expansionary measures stimulate increases in aggregate demand, we would like to say that this is not the case.


It is unlikely that the interest rate cuts had a massive effect on consumer spending as savings during the pandemic still amounted to record highs due to low confidence attributed to the health risks of the virus. At the same time, the increased money supply and liquidity that followed provided by the Bank of England was mainly eaten up by large financial institutions such as banks and pension funds where investments were made into equities, bonds, and more speculative assets rather than the actual economy, increasing financialisation. However, although the cash from QE was unlikely to end up in the pockets of the consumer directly, or even to businesses that invest on tangible assets such as capital, the increased liquidity and lower interest rates allowed the government to borrow record amounts of £2.4 trillion, enabling spending on the Furlough Scheme, which, helped consumers save, and, eventually, once confidence rose, spend, generating demand-pull inflation.


An unbelievably tight labour market is also a contributor to the rising rates of inflation, in nations such as the UK and US workers, are resigning and leaving the labour force. The UK’s exit from the EU has also reduced the number of workers working in undesirable jobs, such as slaughterhouses, which were typically taken up by migrants. Because of this, the number of vacancies for unemployed individuals has reached a record ratio of, 1:1. This is due to record high vacancies paired with unemployment rates of 4.1% and decreasing labour force participation as economic inactivity rates have reached 21.2%. However, although individuals are leaving the labour force, there was a net flow of 193,000 from unemployment to employment.


Yet, despite this seemingly increasing scarcity and demand for labour, wages have fallen behind inflation rates. Wages rose, but when taking inflation into account, pay showed a 0.8% fall from a year earlier, said the Office for National Statistics.


This makes rising inflation rates an issue for UK workers as wages failing to keep track with rising living costs means that workers are seeing a pay-cut in real-terms, as such, individuals, especially those on fixed incomes, will be forced to either cut back on goods or switch from normal to inferior goods. This will reduce living standards within the UK as inferior goods are usually less healthy due to higher preservative content, additionally, families that have to cut back altogether will face a horrible opportunity cost as some have to decide between heating their homes and feeding themselves, whichever decision they make will increase their chances of developing an illness, increasing pressure on the NHS, which, already has waiting lists of over 6 million.


Whether this will be a long-term issue is up to debate, if rising inflationary pressures on those on lower and fixed incomes continue then relative poverty will rise as fewer resources can be allocated to goods such as education, reducing social mobility. Unfortunately, this is likely to happen as the Bank of England forecasts inflation rates to reach 7.25% in April, additionally, low trade union participation within the UK of 23.7% means it is difficult for workers to argue pay-rises, despite the Bank of England’s warnings of a wage-price spiral. The only bit of hope that we have right now is that when looking at the monthly rises in the rate of inflation, we are seeing slowdowns, a 1.1% rise in October went to 0.7% in November and then 0.5% in December, perhaps this cost of living crisis is not here to last.

 

Written by Hubert Kucharski









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