The Profit-Price Spiral

By pinning inflation on workers and wage demands, the Bank of England is covering up the real cause of rising prices: runaway corporate profits.

Independence under the terms of reference advanced in the ’90s embedded certain neoliberal axioms about how, and in whose interests, modern economies ought to function.(RyanKing999 / Getty Images)

Perusing reports from those halcyon days of 1997, when history had ended, and things could only get better, it is hard not to experience a deep sense of unreality. Within days of victory, Gordon Brown undertook ‘the most radical shake-up in the bank’s 300-year history’, by giving the Bank of England independence from political control. To say this attempt to ‘take politics out of interest-rate decisions’ was in keeping with the orthodox economic hubris of the period is to perhaps undersell the move. As the political scientist Wyn Grant noted in a working paper on business and the Blair government:

A key policy lever was thus transferred away from the government to a setting more amenable to global economic forces. It is believed that monetary policy needs to be insulated from political influence in a global economy.

Of course, the Bank of England has always occupied a unique, somewhat haughty place in British political economic history. Formed in the late seventeenth century by Royal Decree to fund military conquest, its closeness to power and geographic location in the City has given it a spatial synonymy with capital throughout history. Though nationalised in 1946 by Attlee’s government, its role in the feted building of the Socialist Commonwealth of Great Britain, as the historian Henry Pelling has noted, was perhaps ill-fated from the offing—following nationalisation, the departing governor and deputy governor were promptly reappointed, and invited to drink sherry at Downing Street.

All of which brings us to the present moment. The Bank’s governor, Andrew Bailey, paid a trifling eighteen times the median salary, has attracted ire for repeatedly calling for ‘pay restraint’, while ex-officials have argued the institution is ‘duty-bound’ to trigger a recession in order to curb inflation. Indeed, the government and the Bank are increasingly marching in lockstep: Simon Clarke, Rishi Sunak’s deputy, has recently called for ‘collective discipline’ in accepting below-inflation pay rises, before confirming that this will be the reality for those in the public sector. The Bank has itself been on something of a spree in terms of increasing interest rates—most recently to 1.25 percent, the fifth consecutive increase.

As some of the more perspicacious commentators have long noted, however, as far as the Bank is concerned, there is little surprising here. Independence under the terms of reference advanced in the ’90s represented the embedding of certain neoliberal axioms in terms of how, and in whose interests, modern economies ought to function.

In other words, there is an institutional angle here. But there is also an analytical one. A common refrain across statements from Bank officials and Conservative Party politicians is that labour costs need to be controlled to cap inflation. Both Bailey’s demand for ‘restraint’ and Clarke’s for ‘collective discipline’ are somewhat undermined by both economic reality—the ONS’ most recent pay data shows real-terms falls in pay by 2.2 percent from February to April—and government plans, emerging in the same week, to allow firms to use temporary staff during strikes, and to abolish the cap on bankers’ bonuses.

Repeated, somewhat desperate, references have been made in recent weeks and months to a wage-price spiral. In a recent briefing paper, the Bank of International Settlements (BIS), the Swiss-based bank for central banks, outlined why this appears an unlikely explanation for rocketing inflation: decades of falling worker power and collective bargaining rates, rising corporate mark-up rates, and ‘the correlation between wage growth and inflation [having] declined over recent decades and [being] currently near historical lows.’

Indeed, this is buttressed by mounting evidence that inflation is being driven by profiteering rather than wage increases. The union Unite recently published research showing that not only were profit margins for the UK’s biggest listed companies 73 percent higher than pre-pandemic levels, but—crucially—that this profit jump can explain close to 60 percent of UK inflation, with less than 10 percent due to labour costs. Further research, jointly undertaken by the think tanks IPPR and Common Wealth—and discussed in detail in Tribune by Grace Blakeley—further demonstrates this trend of profiteering.

Across the Atlantic, two studies undertaken respectively by the Economic Policy Institute and the Institute for New Economic Thinking suggest that increased profit margins have contributed between two and three times as much to inflation as higher nominal wages—which, as the aforementioned BIS report shows, is something of an American phenomenon. Talk of a wage-price spiral when wages are stagnating—and have been for over a decade—is a non-sequitur. It has, of course, political significance: as the sociologist Will Davies has noted, ‘the implication is that anything other than collapsing wages is irresponsible.’

Amid all of this, there is an unshakeable sense that the UK remains haunted by the end of history, ceaselessly going through the motions in a kind of Beckettian performance: a nominally apolitical Central Bank hammering the ‘raise interest rates’ button whenever it gets a chance, the technocratic hand on the monetary tiller merely going through the motions.

Towards the end of last year, the economist Isabella Weber, author of the excellent How China Escaped Shock Therapy, and surely one of the most insightful economists working today, wrote a thought-provoking article for the Guardian, discussing the history and examining the potential of price controls in dealing with the inflation which, since publication, has only increased in scale.

As evidence of profiteering—and its role in inflation—continues to emerge, the salience of this approach is growing. This is doubly true amid the economic context in which the contemporary UK finds itself—a lack of economic resilience meaning that, even in 2017, lower-income households were spending 60 percent of their incomes on essentials. As Duncan Weldon recently discussed at length, real wages are expected to ‘show essentially zero growth between the late 2000s and the mid 2020s.

Combatting corporate largesse should thus be understood as a key, constitutive part of bringing down inflation. The Conservative strategy will not surprise socialists, but any illusions about the technocrats at Threadneedle Street saving the day ought to be swiftly dropped. The danger isn’t of a wage-price spiral, but uncontrolled profiteering—as Aditya Chakrabortty recently put it, ‘the biggest threat to what remains of our tattered social contract isn’t 1970s-style unions but 2020s-era capitalism.’