It is soaring energy costs fuelling UK inflation – not humble pay rises | Richard Partington Economics correspondent

For all of the warnings against a repeat of the 1970s, of industrial unrest, soaring inflation and national decline, it is this period in recent British history that Rishi Sunak wants the country to think of most.

Born in 1980, a year after the winter of discontent contributed to the fall of James Callaghan’s Labour government, Sunak, like millions of others, has no memory of this turbulent decade. Yet the prime minister is hoping to rekindle the idea of greedy union barons bringing the country to its knees.

This week will prove a serious test. Britain is heading into the worst period of strike action of recent years, with mass action on the railways, in the NHS, among nurses and ambulance staff, and by postal workers. More than 1m working days are expected to be lost, the most in any single month since 1989.

Graph: The UK’s worst month for industrial action in the postwar period was September 1979 when almost 12m working days were lost

For Sunak, comparisons with the 1970s could help draw a dividing line between a sensible majority and the militant few: those willing to turn the clock back half a century, jeopardising the first Christmas since the Covid pandemic without restrictions or high case numbers.

No 10 warns that buckling to union wage demands would involve an unaffordable price tag and could “embed” higher rates of inflation. To defeat the “shared enemy” of inflation, workers must take the pain of real-terms pay cuts, the prime minister’s official spokesperson warns. “We would be acting against everyone’s interests if we were to take all the demands and meet them in full.”

There is, however, a big problem with this argument, not least because it comes amid the public sector crisis. Most people know, after a decade of austerity stripping the state to the bone, that failing services and record NHS waiting lists predate industrial action. More talk of belt-tightening sounds just as mad to most people as it rightly should.


It relies on a repeat of a 1970s-style “wage-price spiral”, which growing numbers of economists doubt will fully take hold. The term describes how higher pay settlements prompt companies to raise prices, in a self-fulfilling inflationary game of leapfrog.

It’s clear Sunak views public sector pay as a powerful signalling tool for the wider economy, with a view that crushing wage expectations for the almost 6 million workers here could help nip a wage-price spiral in the bud. However, this is far from where Britain is at.

Very few workers are securing pay deals anywhere near close to inflation. Average annual wage growth across the economy is currently near 6%, a relatively high figure in recent history, but significantly below the 11% inflation rate. This means wages are falling in real terms. According to the Office for National Statistics this fall is the deepest since records began 20 years ago.


In the public sector, pay growth is significantly weaker still, rising at close to 2%, against 6% in the private sector – the widest gap on record. If sustained, it could contribute to more people leaving key jobs in nursing, education and the police, undermining government promises to expand the workforce.

Swati Dhingra, a member of the Bank of England’s rate-setting monetary policy committee, told the Observer the fact that real wages are falling alone should dispel any idea a wage price spiral is under way.

Such is the lack of a spiral that the Office for Budget Responsibility forecasts inflation will erode real pay and reduce living standards by 7% over the two years to March 2024, wiping out the previous eight years’ growth.

Compare this with the 1970s. Despite sky-high inflation, real earnings fell in just one year of the entire decade. Unions successfully bargaining for higher pay to beat inflation was a key reason. With a halving of union membership since 1979, sweeping anti-union legislation, and an increasingly atomised workforce, there is far less chance of this happening again.

Rather than greedy workers, soaring energy prices are behind the inflation shock, as the fallout from Russia’s war in Ukraine drives up household bills, and manufacturing and transport costs. It’s most obvious in the headline rate of goods inflation, now almost 15%. For services, where wages form a larger share of company costs, inflation is running at less than half that rate, at about 6%.

This means that acting to constrain pay would have a limited impact on inflation. At the Bank of England there is a view that lowering wage growth back to about 2.5% – roughly the historical norm before the 2008 financial crisis – could help to reduce the headline rate of inflation by about 1.5 percentage points. In the context of inflation above 10%, that is a drop in the ocean.

This isn’t to say wages have no inflationary impact. After an exodus of mainly older workers and a rise in long-term sickness, unemployment has fallen to the lowest rates since the mid 1970s, tightening the labour market. Brexit has reduced the availability of migrant labour. Firms struggling to recruit are putting up pay in response. Without productivity gains, company profit margins are either being squeezed or prices put up.

If these trends persist, the jobs market could become permanently tighter than in the past. The Bank fears that if workers and businesses expect inflation to remain high, then they will respond accordingly.

It is a risk that ought to be placed in context, however. As well as the fact that wages have failed to keep pace with inflation so far, there are early signs the heat is starting to seep out of the jobs market as Britain heads into a lengthy recession.

Companies are reporting that difficulties with recruitment are easing. Although still at historically high levels, vacancies have fallen in recent months. The widely watched jobs market data from Markit and the Recruitment and Employment Confederation has shown a slowing of wage growth. Meanwhile, figures from Indeed, the jobs website, show advertised pay rates have fallen back in recent months, from a peak of 6.4% earlier this year to 6.1%.

Britain is not suffering a wage-price spiral. It’s time to stop perpetuating that myth.

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