- by Jo Dunleavy
- The Guardian
- Issue #2129
Graphic: pxhere.com (CC0 Public Domain)
There is no shortage of news headlining 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) announces 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, with 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 increases its official cash rate, the media simply reports: “RBA rates to rise 0.25 per cent”. The banks then begin announcing increases in mortgage rates and interest rates on personal and business loans. Again, their actions are simply reported as: “Banks pass on RBA rise”. No mention of what comes next and the impact it will have on living standards.
It’s not long before prices of goods and services are increased. The private sector not only passes on the interest rate rise (which may not affect them immediately) but by a whole lot more so as to boost profits. These price rises 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 free market theory, 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 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 They have been replaced by the domination of large monopolies and cartels operating across industries.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 the 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 they 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.”
Many workers saw their incomes fall 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, irresponsible, causing inflation, and threatening jobs and the prosperity of the nation.
But how do their claims stack up against the actions of big business and the RBA? A closer examination reveals that the wage demands are extremely moderate, in fact quite low and certainly not inflationary.
Take the RBA’s interest rates. A rise of 0.25 per cent does not sound very big, certainly nothing like the four to five per cent a year sought by workers. Then the RBA increased the official cash rate in increments of 0.25 per cent from three per cent to 4.25 per cent.
A leap from 3 to 4.25 per cent in interest payments is huge. Take for example a loan of $100,000 at three per cent. The annual interest repayment would be $3,000. At the new rate of 4.25 per cent it becomes $4,250. That is hike in interest payments of $1,250.
In percentage terms, this increase from $3,000 to $4,250 in interest repayments is 41.7 per cent!! A far cry from the amount being sought by trade unions.
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 on some occasions pass on larger increases than those determined by the RBA. The banks are raking it in, big business is pushing up prices at every opportunity and workers seeking to catch up are blamed for inflation, unemployment, and every other blight 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, nurses, teachers, and other workers have found in their recent 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.
