The end of cheap European labor brought the inflation genie out of the bottle


I’m not sure where the Bank of England got the idea that anti-inflation wage increases are confined to a relatively small number of sectors. It’s certainly not what you hear anecdotally. To the dismay of employers, workers sometimes leave halfway, such is the possibility of higher wages elsewhere.

Average wage growth was 5.8% in the July-September quarter, and even higher at 6.6% in the private sector. Even removing the base and the compositional distortions inflicted by the pandemic, wages are still rising at a rather old rate. In July, the ONS estimated the underlying growth rate to be between 3.2% and 4.4%.

In any event, it is becoming increasingly difficult for the Bank of England and its counterparts in other advanced economies to support the argument that current inflationary pressures are “transient” and will soon subside.

It is certainly fair to argue, as Andrew Bailey, Governor of the Bank of England, does that there is little monetary policy can do about rising global energy prices and other forms of inflation. imported.

Yet if a tight labor market gives workers the bargaining power to raise wages, imported inflation will soon turn into a nationally generated variety, and possibly lead to the sort of wage / price spiral that has tormented policymakers in the 1970s.

Outside of the public sector and some public services, the union power that fueled such spirals at the time has disappeared. But who needs the power of the union when there is a labor shortage to raise wages instead?

The acute labor shortages after the Black Death in the 14th century caused such high inflation; no one would compare today’s pandemic to this catastrophe, which wiped out a third of the European population, but you get the picture.

Now, of course, if the “Nu” variant of the coronavirus turns out to be as horrific as some epidemiologists fear, then all bets are off.

A vaccine resistant Covid strain is everyone’s worst nightmare; demand in the economy would drop again, and we would be back where we were last year before vaccines started making Covid a manageable disease.

Under such circumstances, a resumption of inflation would be the least of our concerns. The financial markets are already starting to assess such a result.

But suppose the Nu strain is just a passing scare; As it stands, the pandemic has inflicted fundamental changes on economies, or rather it has dramatically accelerated a number of pre-existing trends into a series of transformational disruptions.

One of those changes is working from home. The “great retirement” may also have advanced this moment of demographic change mentioned by Charles Goodhart and Manoj Pradhan in their book, The Great Demographic Reversal.

This argues that as more baby boomers retire, the proportion of active workers in the economy will decline, dramatically increasing their bargaining power. Wages and inflation will rise accordingly.

Along with such demographic forces are a number of other transformational changes that will require a significant reallocation of resources within Western economies – de-globalization and the accompanying push for greater economic self-reliance, decoupling from China, political pressures for much higher public spending, and the huge investments and restructuring needed to meet climate change targets. All of these things are almost necessarily inflationary.

Some of today’s price spikes may indeed be ‘transient’, but they are also just a taste of what is to come as we move through a disinflationary era driven by globalization and globalization. mass movement of labor towards more closed and inflationary economic models. the past. Welcome to the Phillips Curve.


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