Commodity prices Commodity prices. Photo: Wikideas1 / Wikimedia Commons / CC0 1.0

Dominic Alexander dissects Tory claims about the success of their economic policies in reducing inflation, and explains why the cost-of-living crisis for working people is far from over

The government wants to claim that its economic policies are ‘working’ and that ‘sticking with the plan’ will bring inflation down to target. This is on the basis that the annual inflation rate fell to 6.8% in July, from 7.9% in June, mostly due to falls in the cost of energy. The most obvious rejoinder is that the inflation that has happened leaves prices still greatly higher than they were, and that the government, at best, has granted only well below-inflation pay rises. The cost-of-living crisis grinds on for most of us.

A closer look at the inflation figures reveals that the roughly 1% drop in the overall inflation rate is hiding some troublesome issues. The ‘core’ inflation rate, which is arrived at by taking out food and fuel prices, remains unchanged at 6.9%. Core inflation being ‘sticky’ is leading to talk that the Bank of England will need to raise interest rates yet again, with all the attendant dangers that this will push an already stagnant economy into a severe recession. In the second quarter of this year, the economy grew 0.2% in real GDP, the lowest of the G7 economies, except for Germany, which is in outright recession. Attempting to claim this situation as proof that his policies are ‘working’ underlines the extent of Sunak’s desperation.

Sector and class

There are some attempts about to blame the persistence of core inflation on wage rises, and no doubt if the Bank of England hikes interest rates again, that excuse will be used at least partly in justification. However, like everything else in a class society, the distribution of wage rises has been highly unequal. By far the highest rises have come in the financial, IT and business services sector, which includes marketing and advertising, at 9.4%, compared to 6.2% for the public sector. The peak of CPI inflation was 11.1% in October 2022, so this puts even a current 9.4% rise into perspective.

Additionally, the aggregated statistic will hide the unequal distribution within the business sector; it is likely that those already earning higher wages will have benefited more. Some indication of where the lion’s share of rises is going lies in the gap between ‘total pay’ and ‘regular pay’, the former including bonuses and non-consolidated awards (for the NHS, for example). While total pay rose in real terms on the year by 0.5%, the increase was only 0.1% for regular pay. With the NHS exception, bonus pay goes to a small minority of higher earners, not workers or the public sector, so this 0.4% difference is startlingly huge considering this is the whole economy under consideration.

The tiny overall positive growth in year-on-year wages trumpeted by the Office for National Statistics therefore obscures the class distribution of gains. The cost-of-living crisis is a long way from being over for the great majority of people, whether they are low earners in any sector, or workers in the public sector.

Research from the TUC, published in March 2022, showed that, at that time, wages in the UK had averaged -0.2% growth since 2007, putting Britain in a group of seven countries within the 33-strong group of OECD economies to have experienced negative income growth in that period. The TUC estimated that this amounted to a £4000 cumulative pay gap. In no way do the meagre below-inflation rises of 2023 make up for that shortfall.

The crisis goes on

Worse may be yet to come, since it seems unlikely that food inflation has come to an end. Food costs, of course, disproportionately affect people on lower incomes, and food is not an optional expense. It is well known that many are having to go without to manage other essential expenses. Unfortunately, the outlook is not good: Michael Roberts points out that ‘the global food price index is turning up again, rising 1.3% in July from June, a second increase in four months. It remains 36% higher than it was three years ago.’ The supply-chain blockages which fuelled the UK’s 17.4% food inflation in the year through June 2023, seem about to return.

This is partly due to the continuing war in Ukraine, but also countries such as India are imposing bans on food exports like rice, due to the impact of the climate emergency on harvests. This summer’s extreme weather in many parts of the world will only exacerbate this already dangerous situation. The climate is also suffering from the El Nino weather event, which in the past has caused a 6% rise in food prices in the year following. The government is notably silent on any policy to ameliorate these effects, while giving the nod to new licenses in exploit oil and gas reserves in the North Sea, which, of course, will only compound the climate crisis, which is now directly influencing the cost-of-living crisis.

Grievous signs of the impact of the cost-of-living crisis are everywhere you might care to look. Possibly among the most egregious is that the company that the government uses to chase unpaid fines, loans and council tax, Integrated Debt Services, ‘saw its profits rocket by 132% last year’, with its activity accelerating in 2022. In general, company profits have risen very significantly in the last year, with manufacturing up 0.4% to 8.8% in the first quarter of this year, while in the service sector, the same rise brought returns up to 16.1%. It is certain that the larger companies are doing better than the medium and small ones, but that only underlines the point that it is those with power in the capitalist economy who are doing well out of the inflation crisis, and those with less power, that is, ordinary workers, who are bearing the brunt of the pain.

The real causes of inflation

Conventional economics insists on one-dimensional explanations of inflation, which enable the argument that wages, rather than profits, must be restrained to keep inflation under control. Marxist economists, however, have shown that inflation has more complex causes, in which profits are at least as important. Periods where high growth and rising economic productivity overcome the increasing difficulty of reproducing the constantly rising mass of capital produce a downward push on inflation. Conversely, where growth, and particularly the productivity of capital is low, as it is at present, then a period of inflation will result.

Crucially in this analysis, wages are only one part of the equation, whereas profit rates are, arguably, the more important variable. The great problem of the British economy over recent decades has been an abysmal failure of capital investment into productivity. This is the real cause of the UK’s greater problem with inflation than other comparable economies, and wage demands have nothing to do with it.

If anything, the problem is the reverse; with low levels of industrial class struggle since the defeats of the 1980s, business has deemed it easier to improve profitability by squeezing workers’ pay and conditions, than by investing capital into plant and equipment which could raise productivity. The result is a stagnant, low-wage economy. The calls for wage restraint from the government and the Bank of England, coupled with a refusal to countenance any kind of interventionist economic policy to direct investment, thus reinforce the existing dysfunctionality of the system. Since rising interest rates make paying government debt a greater burden, there are the usual voices saying that government must be further restrained. This, however, would only close off the possibilities of a solution.

We don’t have to accept these limitations to economic thinking. Firstly, it is worth pointing out just how much capital is sloshing around the system. Corporate Watch recently released a report on shareholder earnings from dividends and share buy backs just from Shell and BP since 2015. The total earnings were calculated according to available data, which largely comes from the big institutional investors, particularly private equity firms like BlackRock, so does not represent the real total, but nevertheless amounted to £131bn. This is a staggering amount of money to come out of just the top two fossil-fuel corporation in eight years.

Corporate Watch point out that the sum ‘could fund solar panel installation for approximately 13 million houses.’ Of course, since institutions like pension funds are among the destination for these earnings, this sum couldn’t just be appropriated. Nonetheless, the figure indicates the colossal quantities of capital available in the economy that could be directed towards investment in sustainable energy and infrastructure, and other social needs that could rebound towards economic recovery. A push towards building sustainable infrastructure would have the collateral benefit of improving investment in productivity, simultaneously reducing Britain’s dependence upon imported energy. Otherwise, sticking to economic orthodoxy will just dig a deeper hole for the UK economy.

Fight for more

The sheer quantity of capital in the economy points to another change of economic direction that is needed, which is a focus on redistribution. Our economy and society are sick with inequality, and the increasing concentration of wealth and power over available capital (the Corporate Watch report notes the high concentration of investment capital in three major private-equity firms). Of course, neither the Tories nor Labour have any intention of making inroads on the wealth of the elite or corporate giants. Labour’s economic policy lamely focuses on the idea that somehow restarting growth on capital’s own terms is the only way to provide any extra revenue for social investment. It thereby effectively accepts the terms of Thatcherite ‘trickle-down’ economics, without acknowledging the clear record of its abject failure.

This leaves the organised working class as the only force capable of breaking the logjam in the economy. Far from heeding calls for restraint in wage demands, increasing the militancy and strength of the working class is the only way of forcing our rulers to shift position. The ruling class is deeply divided and flailing about in desperation to find a way out of the mounting crises of their rule, and their economic consensus is increasingly fragile. If workers refuse to take the hit to living standards and fight for better, then it can become possible to break through.

It may be that the strike wave of 2023 has reached a hiatus, but rank-and-file initiatives have emerged that can be built up further before a new round of struggle. This is also the time for social movements to feed into the combativity of the whole class, and one way to start is by organising the biggest possible demonstration at the Tory Party conference in October.

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Dominic Alexander

Dominic Alexander is a member of Counterfire, for which he is the book review editor. He is a longstanding activist in north London. He is a historian whose work includes the book Saints and Animals in the Middle Ages (2008), a social history of medieval wonder tales, and articles on London’s first revolutionary, William Longbeard, and the revolt of 1196, in Viator 48:3 (2017), and Science and Society 84:3 (July 2020). He is also the author of the Counterfire books, The Limits of Keynesianism (2018) and Trotsky in the Bronze Age (2020).