The IMF went in search
of a wage-price spiral
and instead threw us
a curveball, says James Meadway

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With university lecturers on strike last week, and postal workers, bus drivers, civil servants and nurses expected to join them before Christmas, the media campaign against “greedy” unions has predictably stepped up a gear. Mick Lynch, the railworkers’ leader whose articulate defence of trade union principles made him a social media star over the summer, has predictably been made the target of tabloid fury. But behind Lynch or any other union leader are hundreds of thousands of ordinary union members looking at their pay packet and seeing more and more of it disappearing into the soaring costs of living. It’s inflation, not union bosses, pushing people into taking strike action.

Away from the front pages, there’s a more subtle version of the attack on workers looking to protect their living standards. It’s the idea that a “wage-price spiral” might set in – that, far from people asking for higher wages because prices are so high, prices are so high because people have been asking for higher wages and salaries. The theory is that when workers demand more pay, firms have to put up prices to cope, which in turn leads to more pay demands, and then higher prices, and so on in a spiral upwards.

The Governor of the Bank of England, Andrew Bailey (salary £575,538), was thinking about this effect when he called for workers to exercise “restraint” in pay rises. This kind of thinking is why the Bank has been so determined to push up interest rates. Rising interest rates makes a recession more likely. A recession typically means higher unemployment – and the Bank of England’s forecasts think another 500,000 or so people will be pushed into unemployment next year. The Bank of England wants rising unemployment to frighten workers so much that they don’t risk asking for higher pay. Interest rate rises are a crude and brutal mechanism to try to hold back inflation.

But on the face of it, this idea of wage-price spiral in Britain is self-evidently nonsense. Regular pay, excluding bonuses, is currently rising in Britain by an average of 5.7 per cent over the last year (including bonuses, it’s 6 per cent). It’s true that this is a faster pay rise than in recent years. But when prices are rising by 10.1 per cent, the highest rate of inflation for over 40 years, the real value of that pay is falling rapidly. Wages and salaries are not dragging inflation up – they are lagging far behind price rises.

The primary reason for this is that the inflation we’re experiencing today doesn’t come from domestic sources. It’s imported from the rest of the world. The global price of essentials – things we cannot easily avoid buying – like food and natural gas have shot up over the last 12 to 18 months, driven by the after-effects of Covid, extreme weather like floods and droughts, and of course Russia’s invasion of Ukraine. Britain imports about half the food it consumes, and half the natural gas. So rising international prices in both turn rapidly into rising domestic prices. This kind of inflation has absolutely nothing to do with how much we pay people in Britain. If we pay nurses here less, Qatar won’t sell us cheaper natural gas to compensate for it. That’s not how the economy works.

The Bank of England and others pushing the wage-price spiral argument realise this. So they offer a slightly more sophisticated version of the same claim: that even if wages are not pushing up prices today, there’s a risk in the future that a wage-price spiral will take hold. That means they have to move today, to stop the spiral mechanism getting a grip on the whole economy.

Could they be right? Could we find, some time next year, that pay in Britain has gone up so much it has translated into rising prices? A possible answer to this has just come from an unexpected source – the International Monetary Fund. We know the theory of the wage-price spiral, but the IMF’s researchers wanted to see whether it ever applied in practice. Looking at developed economies across the world, including Britain, over the last 60 years, they wanted to find times when rising wages and rising prices had preceded faster rises in wages and prices – this would be clear evidence of a wage-price spiral.

Yet the evidence is that this actually happens very rarely. “Wage-price spirals…” say the researchers, “are hard to find in the recent historical record.” Only a “minority” of “inflationary episodes” across all 39 countries over six decades ever look like this. Strikingly, periods of low wage rises – like we saw in many advanced economies, including Britain, over the 2010s – followed by high inflation hardly ever turn into wage-price spirals. Low wages are a sign of limited worker power. It’s harder for people to suddenly demand higher pay if they lack the power, like trade union membership, to do so. The IMF economists conclude that any risks of wage-price spiral today across the developed economies are minimal.

History, in other words, works against the wage-price spiral theory. What is happening today, instead, is that rising prices have been turned into very high profits for at least some parts of the economy – energy companies, most obviously, where the likes of BP and Shell have regularly made record-breaking multibillion pound profits from skyrocketing prices. Wages and salaries, meanwhile, have lagged far behind. Faced with record profits and massive price increases, it’s absolutely right for workers to demand higher pay – and to strike if they need to.

James Meadway is an economist and director of the Progressive Economy Forum, an independent thinktank (

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