The truth about inflation and how to fight it

Hannah Sell, Socialist Party England and Wales general secretary, looks at what lies behind the current inflation crisis and how workers can fight back.

This year, 2022, is predicted to see the biggest fall in living standards in the UK since 1956. Inflation, according to the Retail Price Index, is already at 8.2% and is expected to rise further throughout the year. Soaring energy and food prices are leaving growing numbers of working-class people choosing between heating and eating.

Capitalist economists and politicians are divided on how to deal with multiple crises facing their system. On one issue, however, they are overwhelmingly united: that it should be workers who bear the brunt of the pain.

It would be too unbelievable, even for Tory politicians, to claim that it is wage rises that have caused the current surge in inflation. But that isn’t preventing a sustained campaign against any increases in workers’ pay to counter inflation.

Andrew Bailey, Governor of the Bank of England, put it crudely, demanding “to see a moderation of wage rises” as the way to “get through this problem more quickly”. No doubt Bailey, on £575,000 a year, doesn’t need a wage rise to be able to pay his gas bill, but it is a different story for the rest of us.

Bailey was criticised by capitalist commentators for the crassness of his statement, but not the content of it. For example, Martin Wolf, chief economics columnist for the Financial Times wrote: “This remark was certainly unpopular and probably useless. But analytically he was right. The more wage earners seek to restore their purchasing power in an economy hit by these externally imposed losses, the higher will be inflation and the more merciless the needed monetary squeeze.”

He went on to say: “If people play a game of pass the parcel, by insisting on higher wages and salaries in order to offset the reduced real incomes, the outcomes would either be a squeeze on profits, which would damage investment, or cause an inflationary spiral, which would damage almost everybody.”

Is he right? Is the inevitable consequence of workers successfully fighting for wage increases going to be creating further misery? The answer to this is a clear and unequivocal ‘no’! What is more, the only way to prevent a further dramatic undermining of the living standards of the working class is for the trade union movement to lead a serious struggle to fight for real wage increases across the board.

Capitalist chaos

Capitalism is a chaotic, unplanned system, based on the private ownership by a tiny minority – the capitalist class – of industry, banks, science and technique. It is driven not by any rational plan, but by the thirst for profit of this tiny minority. Ultimately, that profit stems from the exploitation of the working class. Yet the working class has no say whatsoever in the economic decisions made by the Tory government or those whose interests it defends – the owners of industry and the bankers.

The current surge in inflation has a number of causes, including the huge sums pumped into the economy by governments to prevent economic disaster during the pandemic, the inevitable spike in demand as economies reopened, and the disruption of global supply chains caused by Covid measures and events since – not least the war in Ukraine.

The global increase in energy prices, which has fed through into the prices of other commodities, is an important factor. This in itself has multiple causes. The Russian invasion of Ukraine has triggered further rises, coming on top of the increases flowing from the surge in demand for energy as Covid restrictions were lifted.

However, this is not to suggest that the current price increases are simply ‘acts of God’ in which the energy companies have played no role. On the contrary, fat profits are being made out of our soaring bills. For example, two UK oil and gas producers alone, Neptune and Harbour, have just paid $1.2 billion in dividends to shareholders. Based in the North Sea, neither has seen any increase in their production costs, but that hasn’t stopped them taking the opportunity of soaring global prices to make a quick buck.

Overall, around 50% of Britain’s gas comes from the North Sea, but the increased costs to consumers in Britain are just as high as in countries like Germany that are more reliant on Russia.

Not only are big shareholders and speculators making a fortune out of rising energy prices in the short term, but there has also been a complete failure over many decades to invest the large profits made, above all in clean energy, which has prepared the ground for the current crisis. 

Failure to invest does not only apply to the energy industry. Martin Wolf’s fear of a ‘profit squeeze’ leading to a fall in investment is laughable. His own newspaper, the Financial Times, pointed out in February: “It is difficult to overestimate the lack of UK capital expenditure growth, compared with the wider economy, its historical trend or other countries.” In other words, investment levels are already at very low levels.

Huge profits

This doesn’t stem from a lack of profits to invest. On the contrary, in 2019, for example, the FTSE 100 companies paid a record £110 billion in dividends to shareholders, double the figure of a decade previously.

This is a condemnation of modern capitalism, particularly in Britain. In its early days, despite the inevitable periodic crises that are intrinsic to it, and despite its brutal exploitation, the system nonetheless took society forward. The drive to maximise their profits pushed the capitalists to invest in the development of the productive forces, science and technique. Today it is more profitable to keep the money in the bank or gamble it on the financial markets!

And they have plenty of money to put into the bank. In Britain, around £250 billion a year (in 2020 prices) from 1980 to today has been transferred from the pockets of the working class to the capitalist class. That process was already in full swing before the 2007-08 Great Recession and has accelerated since. There would be nothing inflationary about workers succeeding, via struggle, in forcing the bosses to transfer some of that vast wealth back into the pockets of the majority.

Martin Wolf and his ilk argue that, in response to increasing wages, bosses would have no choice but to increase the price of their commodities, thereby creating an inflationary spiral. In fact, however, the capitalists always increase prices to the maximum they can get away with and still sell their products – as the current increase in energy prices graphically demonstrates.

Conversely, they do not lower their prices because their workforce is being paid less, but only if they are forced to in order to be able to sell their commodities. The wages of workers assembling iPhones in China have increased, but they still only earn around £2 an hour, while the iPhone 13 costs a whopping £750.

Capitalism is increasingly a system in crisis. The war in Ukraine is the latest horrific example of the growing tensions between the major capitalist powers, and the resulting increase in trade barriers. And within that British capitalism – a second-rate power – is falling further behind its rivals.

Race to the bottom

Over recent decades successive capitalist governments – Tory and New Labour – have encouraged a ‘race to the bottom’, relying on low wages and super-exploitation to make British capitalism ‘competitive’.  Of course, no country can win the ‘race to the bottom’; there are always lower-paid workers somewhere else. Now this Tory government pays lip service to ‘levelling up’ but is, in reality, allowing real wages to plunge much further via ‘inflation’ austerity.

There is no prospect of world, never mind British, capitalism entering an era of sustained growth and offering sustained improvements in living standards for working-class people. On the contrary, we are facing a difficult and uncertain period, with a new recession ahead at a certain stage.

While a certain amount of inflation can be useful to the capitalist class – as a tool to make the working class pay for Covid crisis expenditure and also to lower the real value of historic debts – they are desperate to prevent it growing further or continuing long term. However, given the enormous levels of debt in the British economy, any attempt to cut across inflation via significant rises in interest rates could trigger a new downturn. For example, 20% of businesses are ‘zombies’, only able to meet debt interest payments even at the current low level of interest rates.

And whatever measures the Bank of England and government take, they will not automatically be able to prevent further inflation. Any devaluation of sterling, for example, would lead to further increases in the costs of imported goods.

What conclusions should the workers’ movement draw from this? Firstly, to launch a determined fight for wage rises at least in line with inflation for all. The national trade union demonstration on 18 June should be turned into a massive show of strength, and used as a launch pad for coordinated action over the question of pay. 

And as Starmer’s New Labour is not prepared to fight for the interests of working-class people, it is also necessary for the trade unions to begin to build a new mass workers’ party in order to have a political voice.

The struggle against inflation austerity should be organised around a fighting programme, including:

• A £15-an-hour minimum wage for all, without exemptions. For automatic increases in the minimum wage linked to average earnings or inflation, whichever is higher
• For all wage rates to be automatically increased at least in line with price rises. Substantially increase pensions and other benefits to compensate for inflation
• As a first step in fighting inflation from a working-class standpoint, set up popular committees, including trade unions and consumer groups, to monitor prices and measure the real cost-of-living increases for working people
• Open the books of companies, especially the big companies that dominate the economy, to determine their real costs, profits, executive pay and bonuses, etc
• Immediate nationalisation of the big oil and gas companies, to be run as public companies under workers’ control and management, to meet the needs of the majority of society, and in order to carry out a major switch to clean, green energy, without any loss of jobs, pay or conditions
• Renationalise the electricity, gas, and water utilities, to be democratically run under workers’ control and management to serve the needs of society
• Nationalise the banks and financial institutions, to provide cheap credit for the planned development of industry and services, and to provide cheap credit for housing and small business.
• Nationalisation should be carried out with minimum compensation, on the basis of the proven need of shareholders.
• For a new mass workers’ party, based on the trade unions, drawing together workers, young people, and activists from workplaces, and community, environmental, anti-racist and anti-cuts campaigns, to provide a fighting, socialist, political alternative to the pro-big business parties.

Finally, it is necessary to draw the conclusion that we can’t afford this rotten system. The measures above, together with international cooperation with workers in other countries, would be steps towards the democratic socialist planning of the economy, the only answer to the profit-dominated chaos of capitalism.