According to new research by the Office for National Statistics, rising salaries do not contribute to UK inflation more than usual. This could allay fears of a spiraling wage-price.
A measure of domestic price increased by 7.9% in the year up to the second quarter. The ONS stated that higher unit labor costs accounted for around two fifths of the increase, and higher unit profit for about a fifth. This is “in line with previous inflation cycle.”
The research will help to dispel the myth that the UK’s inflation crisis is due to greedflation and firms abusing their pricing power in order to increase profits. Workers may also be bidding up wages in a tight labor marketplace to maintain living standards despite rising energy and food prices.
The ONS made a distinction between the inflationary climate of today and the one of the 1970s when “higher labor unit costs played a relative larger role” to contribute to the domestic price pressures following oil shocks.
The recent increase in labor costs is likely to be a reaction to the higher inflation caused by external shocks, such as the war in Ukraine which drove up energy prices and the pandemic, which caused an explosion in demand coupled with a squeeze on supply.
The ONS stated that “Changes to labor and capital income may be responding to a higher inflation, rather than driving it. This is especially true in cases of external shocks.”
The research concluded that the lower amount of spare capacity on the labor market and the bargaining strength this affords workers “might have contributed to the persistence of price inflation.”
It is in line with Bank of England Policymaker Catherine Mann’s concern about the fact that the longer the inflation rate remains above the 2% target the higher people’s future expectations of prices will be.
The ONS stated that in the 1970s when labor costs contributed more to inflation at home, “higher expectations of inflation are likely to be a major factor in maintaining the purchasing ability of real labor income.”