In May real wages fell by almost 1 percent. In fact, wage growth has been stagnant for over a year.
This data exposes the foolishness of suggesting that wage restaint will reduce inflation. Over the last year, real wages have been declining but inflation is soaring.
A little clarity is needed here. Inflation is caused by excess monetary growth. Wage growth in excess of productivity causes unemployment. Wage restraint will limit to some extent employment loss. It will do nothing to reduce inflationary pressures.
Recent wage settlements were based on expectations of lower inflation. Now that inflation is picking up, the UK is drifting towards a wage-price spiral. In January, a new round of wage negotiations begin. Then, the Bank of England will have some tough choices: will it accomodate higher wage settlements with lax monetary policy, or will it finally wake up to the inflationary dangers and crack down on price expectations?
The signs so far are not good. The MPC have repeatedly capitulated when confronted with worsening inflation numbers.