The Guardian • Issue #2053

The facts about wage rises and inflation

Outside of the Reserve Bank of Australia, a solitary man sits.

Photo: Alex Proimos – (CC BY-NC 2.0).

There has been no shortage of news headlines, big business and government warnings that a wages breakout will cause inflation: “Teachers’ rise a risk to inflation,” “ACTU wage claim would put jobs at risk,” and other claims that wage rises will harm economic recovery. Every time a group of unions succeeds in winning a wage rise, the same claims are trotted out.

But when the Reserve Bank of Australia (RBA) announced another rise in interest rates, there were no headlines warning “Interest rate rise will cause inflation.” When record corporate profits are announced, they are heralded as great news, no warnings that the price hikes caused inflation.

There are no news headlines or hard government warnings such as: “Profit surge causes inflation,” or “Price hikes threaten economic recovery.”

When the RBA increased its official cash rate last week, the media simply reported: “RBA rates to rise 0.25 per cent.” The next day the banks began announcing increases in mortgage rates and interest rates on personal and business loans. Again, their actions were simply reported as: “Banks pass on RBA rise.” No mention of what comes next or the impact it will have on living standards.

The private sector not only passes on the interest rate rise (which may not affect them immediately) but by a whole lot more to boost profits. These price rises will drive up the Consumer Price Index (CPI), a measure of price inflation and boost the profits of banks and big business. They are the cause of inflation.

In a truly free market situation, raising interest rates and hence the cost of home and other loans (which flows on to rent) leaves people with less money to spend on goods and services. This reduces demand and so companies do not increase prices, and may even reduce prices.

But the good old days of free markets, with supply and demand dictating prices are long gone. They have been replaced by the domination of large monopolies and cartels operating across industries. When demand declines (people have less money to buy what is produced), they may decide it is more profitable to raise the price and sell fewer products at a higher price.

When trade unions seek wage rises to cover the additional burden placed on workers and their families by higher interest rates and price rises, the media, business sector, and government, as one, come out strongly against their demands, warning that a “wages breakout would cause inflation.”

They don’t oppose the interest rate rise, they don’t oppose the price rises. Apparently those rises are good for the economy, and governments shouldn’t “interfere.”

Workers’ wages did not cause the RBA increase, they did not cause the rise in home loan repayments and rental increases, nor did they cause the rise in the price of petrol, electricity, transport, medicines, health services, education, and other goods and services.

These price rises are directly related to private profit gouging. The banks were forced to lower their interest rates during the financial crisis and economic recession. The big banks and RBA openly admit their aim is to restore them to their “historical average.” The RBA governor boasted to an international conference recently that in Australia the “lowest rate of return on equity earned among the major banks … over the past two years was about 10 per cent in underlying terms …”!

Many workers saw their incomes fall over the past two years as they lost their jobs or had their hours and wages reduced. Trade unions in some instances negotiated shorter hours, non-work days and lower wages to assist businesses through the economic crisis. But when they ask for a wage rise of 12 or 15 per cent over three years, they are portrayed as greedy and irresponsible, causing inflation, threatening jobs, and the prosperity of the nation.

In reality, the interest rates charged by banks and other financial institutions are far higher than the official RBA cash rate – two, three, four or more times higher – and banks have on some occasions passed on larger increases than those determined by the RBA. The banks are raking it in, big business is on the rebound pushing up prices at every opportunity and workers seeking to catch up are blamed for inflation, unemployment, and every other ill of the capitalist system.

The combination of rising prices and higher interest rates means workers, pensioners, and the unemployed can buy less with their income. This reduction in demand is what leads to industry operating below capacity and sacking workers. Not workers’ wage rises.

In pure economic terms raising wages and pensions stimulates demand, results in job growth and assists economic recovery. But more importantly, wage and pension increases are necessary to restore and improve living standards of the people. That should be the prime objective of the economic system – serving the needs and interests of the people, not private profits.

As the teachers, building, maritime, and other workers have found in their union campaigns for wage rises, they do not come without a huge struggle. Part of that struggle is to expose the myth that wage rises cause inflation for what it is – an ideologically based lie used to suppress the struggle for workers’ rights.

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