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Rising inflation, rising inequality

Inflation, reduced real terms wages, and strikes are a trio of economic factors that have a significant impact on individuals and the broader economy. As inflation rises, the cost of goods and services increases, eroding the purchasing power of money. Over time, this results in a reduction in real wages as nominal wages fail to keep pace with inflation. When real terms wages decrease, workers are faced with two choices: they can either go on strike and demand higher wages, which can further fuel inflationary pressures, or they can take on greater levels of debt to maintain their standard of living. This can create a bubble of over-leverage and bad debts, which is what led to the 2008 financial crisis.

The recent surge in inflation, which is being driven by a combination of supply chain disruptions, rising commodity prices, and an increase in demand as economies recover from the pandemic, has led to a decline in real wages in many countries. For example, in the United States, real average hourly earnings for all employees decreased by 0.8% from December 2020 to December 2021. In the UK, real wages fell by 3.6% between 2010 and 2018, despite nominal wages increasing by 18%. These figures illustrate the impact of inflation on the purchasing power of wages.

As real wages decline, workers may choose to go on strike to demand higher wages. However, this can exacerbate inflationary pressures if employers respond by raising prices to cover the increased wage costs. For example, in the 1970s, a period of high inflation and labour unrest in the UK led to the Conservative politician coining the term "stagflation", which described a situation in which inflation and unemployment were both high. This was largely due to the fact that wage demands by workers were outpacing productivity gains, leading to a rise in the cost of goods and services.

Alternatively, workers may choose to take on more debt to maintain their standard of living. This can lead to a bubble of over-leverage and bad debts, as was seen in the run-up to the 2008 financial crisis. In the US, household debt reached a record high of $14.56 trillion in the third quarter of 2021, driven by a surge in mortgage and auto loans. While low interest rates have made it easier for households to service their debt, there are concerns that rising interest rates could lead to a wave of defaults and bankruptcies. A trend we are already witnessing with 75,170 homeowner mortgages in arrears of 2.5 per cent or more of the outstanding balance in the fourth quarter of 2022, a modest but noticeable 1 per cent greater than in the previous quarter. This increases to 5 percent increase for buy-to-let mortgages. Or consider the increase in company bankruptcy figures illustrated below.

The simple fact is the interplay between inflation, reduced real terms wages, and strikes highlights the complex and interdependent nature of the economy. As policymakers and individuals navigate these challenges, it will be important to strike a balance between supporting economic growth and stability while also ensuring that the benefits of growth are fairly distributed across society.

The complex interplay between rising inflation, reduced real terms wages, and strikes has been a thorny issue for policymakers and individuals alike. However, a range of solutions have been implemented in various countries, with varying degrees of success.

So what can we do?

Our Governments can take action to control inflation and ensure that wages keep pace with the cost of living. One approach would be to raise interest rates as we have seen the Bank of England do, this can help to cool off demand for goods and services, thereby reducing upward pressure on prices. This approach has been used in countries such as Brazil and Turkey, where interest rate hikes helped to bring down inflation rates. But let me stress, this ‘cools’ off demand significantly because of reliance on debt throughout the economic, if interest rates rise it makes borrowing more expensive so we ‘think twice ‘ before purchasing. Cash become king in times of high interest on borrowing. Hence why we are seeing a move by Asset Managers towards holding greater cash assets.

Another longer term approach is to increase public investment in infrastructure and education. This can create jobs and boost economic growth, which can in turn help to reduce inflation and support wage growth. South Korea invested heavily in infrastructure in the 1960s and 1970s, which helped to transform the country into a major economic power. And Singapore is a notable example of a country that has successfully implemented education related increased productivity policies to drive economic growth.

Employers and unions can work together to negotiate fair wages and working conditions. For example, the Dutch "Polder Model" is a consensus-based approach to policymaking that involves negotiations between employers, unions, and the government. This approach has helped to keep wage growth and inflation rates relatively low in the Netherlands.

Individuals can also take steps to manage their debt levels and build up their savings. In Japan, for example, individuals traditionally have a high savings rate, which has helped to stabilize the economy during periods of economic uncertainty.

There is no one-size-fits-all solution to the challenges of inflation, reduced real terms wages, and strikes, a range of policy solutions and individual actions have been implemented in various countries with varying degrees of success. By taking a balanced approach that promotes economic growth and stability while ensuring that the benefits of growth are shared fairly, policymakers and individuals can help to navigate these challenges and build a more resilient economy.

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