First rise in inflation since 2023

Though if all those with higher wages just put the money in the Bank, and dont spend it, then that would not increase inflation.

Putting the money in the bank would have the same effect on the economy as not having a pay rise at all!

Of course, it might make the person saving it feel more financially secure in case of a future shock, which is not an inherently bad thing, particularly if the person is not well off, but as our economy and living standards are dependent on providing and buying goods and services the banked money will have no immediate effect on it.

This is partly why the 'wealthy' are not particularly beneficial to the economy; they don't spend their surplus money, they use it to make more money for themselves by speculating with it or investing it.

If you have spare cash, enough to pay a mortgage the first thing you should do is buy a house because taxation is very low (currently) on your own home and house price inflation has historically been high.

Very few keep high bank savings unless it’s a pension, you then only get taxed on income in retirement, if your employer contributes it’s a good deal.

M0nica

Wages affect inflation because they are part of the cost of producing goods and services. Manufacturers/service providers have to raise prices to pay the extra wages.

They also contribute to inflation because they add to demand in the economy. More mony chasing the same amount of goods, so prices go up to reduce demand sufficient for supply.

Look at rents, as more and more potential tenants chase fewer flats rents go up, so if people have more money and want to rent better properties, rents will go up until demand and supply are in balance again.

Agree with this. And what David writes.

Though if all those with higher wages just put the money in the Bank, and dont spend it, then that would not increase inflation.
As I understand it.

Wage rises can only be absorbed if the worker can be more productive, new technology, different working method, lower level of service etc. Supermarket self checkouts are an example, online ordering at MacDonalds, the order goes straight to the kitchen.
It’s difficult to make labour intensive work more efficient, cleaning, waitress service, care work, inevitably they are minimum wage because the customer doesn’t want to pay, the only way to improve wages is to increase the statutory wage then it’s the same for all businesses.

Maizie Manufacturers and service providers can only absorb increasing prices so far, after that they are losing money and go bust.

As the recent period of high inflation has shown when costs, including wages go up beyond a certain level, no one can absob all the raised costs so the whole market increases prices.

Also while manufacturers may contain a few small rises, they will at the first available moment introduce small inremental rises to put them in a position where they can absorb costs the next time.

As wages slowly go up (if they ever do), cost of good sold is not necessarily impacted. Wages are not passed as one would think per lager or per big mac. Pass through is not automatic, small wage increases can, many times, be absorbed to keep selling - to people who, with higher wage, have a bit more available funds.

At the end of the day 2+2 does not equal 6 , if spending does not equal income the result is borrowing.

It does not matter what economic theory is held, it has not worked for the UK for at least 20 yrs, we have continually reduced production in the economy, resulting in more imports and even less exports. Yet increasing demand for services and therefore votes has resulted in increased borrowing with nothing left to encourage growth.

Like any business the government has to have cash to invest, some of it is borrowed, to provide the services the nation needs. The return of that investment comes back over a period of time as taxation, if there is a surplus it can reduce borrowing or improve infrastructure, if there is a deficit borrowing increases

M0nica

Wages affect inflation because they are part of the cost of producing goods and services. Manufacturers/service providers have to raise prices to pay the extra wages.

They also contribute to inflation because they add to demand in the economy. More mony chasing the same amount of goods, so prices go up to reduce demand sufficient for supply.

Look at rents, as more and more potential tenants chase fewer flats rents go up, so if people have more money and want to rent better properties, rents will go up until demand and supply are in balance again.

They may well be the cost of producing goods but there is no automatic correlation between wage and price increases. The producer may cut margins to cover the cost, particularly if they think their customers won't pay the price increases.
They might also try to improve productivity by cutting staff.
The very fact that raising the minimum wage doesn't lead to price inflation seems to indicate that the assumption you are making is not correct.

Increased demand should lead to increased production, or could even lead to previously surplus stock being sold.

By the reasoning of the truisms you quote no-one should ever have a pay rise... and demand and supply would never balance because there would be immediate action to take the excess money out of the economy to depress demand. if a payrise were given.

I can't see any growth prospects in your scenarios...

Wages affect inflation because they are part of the cost of producing goods and services. Manufacturers/service providers have to raise prices to pay the extra wages.

They also contribute to inflation because they add to demand in the economy. More mony chasing the same amount of goods, so prices go up to reduce demand sufficient for supply.

Look at rents, as more and more potential tenants chase fewer flats rents go up, so if people have more money and want to rent better properties, rents will go up until demand and supply are in balance again.

Sorry, above was in answer to David49. I forgot to quote his post.

No , Norway's economy isn't stagnant because it makes a *profit *from its energy exports. it has a trade surplus, as it used to be called.

I was interpreting your concept of 'balance' as being the Reeves one in which expenditure has to equal revenue. No country, or business could do anything other than stagnate in those circumstances.

If you meant 'balance' in the accounting sense, whereby all income and expenditure has to be accounted for and the accounts could show a positive or negative balance then I apologise for misunderstanding you.

The UK will be 'repaying its borrowings' for ever. Do you not understand that bonds and national investment instruments are in actual fact the savings and investments of institutions, such as pension funds, and individuals. They don't particularly want to be repaid, they want the income from the interest. There is also a speculative secondary bond market.

This is the 'national debt' that has existed for some 300+ years..

GrannyGravy13

Thanks MaizieD

I also have a problem with political journalists (print, TV and radio) who along with the Chancellor of the day perpetuate the myths of no money left, black hole and household economics when referring to the nation’s economy.

Yes, thanks MaizieD for your well informed demolition of some of the neoliberal economic ideology, which has become mainstream since Thatcher, and the pattern seems to be continuing unfortunately with our present Chancellor.

The only countries that run a surplus are mostly big energy producers, in Europe we have Norway and Denmark notably. The UK has a long way to go before it repays the borrowings it has so let’s not get excited about having too much money.

I am hoping the economy is going to be managed in a way the services we need are paid by the population as a whole, any borrowing/creation is used to improve the infrastructure.

Economies like Norway isnt “stagnant” taxation is high and the surplus is used to improve infrastructure for the future. Im not suggesting UK could follow their path, in fact our population is so high and increasing it’s highly unlikely. Our economy has fallen so far behind our competitors it’s going to take 10 yrs to build up again.

David49

I do realize that, but at the end of the day the budget has to balance or borrowings increase, after you have invested the money there needs to be a payback, growth would be just that.

It seems to me that Labour don’t want to increase borrowing, they are going to try to manage with increased taxation and trimming services

The UK (and its precursors) has been running a deficit for the greater part of at least the past 300 years. This has not seriously affected the government's ability to finance anything it wanted to. The obsession with 'deficits' and 'balancing the books' is of a far more recent origin.

In fact, if the nation's outgoings were to equal its incomings the economy would be stagnant as there would be nothing spare for new investment.

If the government were to run a surplus (incomings more than outgoings) it would actually be draining the economy of money in circulation (i.e for economic activity). The only 'surplus' which wouldn't do that would be if we made a surplus from exports. But we don't, we import more than we export.

The other option open to the government as far as financing is concerned is direct money creation. We have done it at least 3 times already since 2000 at no detriment to the country or to the 'taxpayer'. We don't need to 'borrow' from anyone.

growstuff

MaizieD

growstuff

David49

Ignore the last line

Public service workers may not directly influence inflation but taxes will rise to pay the extra or the service they provide will fall. Bus drivers get a pay rise but service frequency falls, or any other comparison.

Most bus drivers aren't public service workers.

Taxes don't fund spending, it's the other way round. Spending gives rise to taxation.

Before the money spent on the wage increases returns to the treasury via taxation it will have stimulated economic activity in the domestic economy. Which is what we need.

I know.

Sorry, it wasn't meant for you, it was, meant for David49

I know you know 😆

MaizieD

growstuff

David49

Ignore the last line

Public service workers may not directly influence inflation but taxes will rise to pay the extra or the service they provide will fall. Bus drivers get a pay rise but service frequency falls, or any other comparison.

Most bus drivers aren't public service workers.

Taxes don't fund spending, it's the other way round. Spending gives rise to taxation.

Before the money spent on the wage increases returns to the treasury via taxation it will have stimulated economic activity in the domestic economy. Which is what we need.

I know.

I think supermarkets are profiteering
I know their prices have gone up substantially, but every time I go into my local Tesco’s, something has gone up by 10 or 20p. I think they do exactly what they like now.
We all need to eat don’t have to buy a new coat but we do need food and I think they’re attitude is take it or leave it.

In a surplus situation growers will accept a marginal profit rather than none, in a restricted market they will sell into the most profitable market they can.

Supermarkets show no supplier loyalty at all, nor do growers, one grower I know supplies M&S and Aldi, obviously when there is limited supply it goes to M&S who pay more.

What has horrified me this week is the report by the IFS which said that during the 2022/23 period of inflation of food prices the supermarkets' budget food ranges actually increased by a greater percentage than did the same foods in the higher price range. The variation within the range could be as much as a 20% difference.

I seem to recall Jack Munro highlighting this on twitter at the time.

Report was on the front page of the Guardian Weds. 14th Aug.

I do realize that, but at the end of the day the budget has to balance or borrowings increase, after you have invested the money there needs to be a payback, growth would be just that.

It seems to me that Labour don’t want to increase borrowing, they are going to try to manage with increased taxation and trimming services

growstuff

David49

Ignore the last line

Public service workers may not directly influence inflation but taxes will rise to pay the extra or the service they provide will fall. Bus drivers get a pay rise but service frequency falls, or any other comparison.

Most bus drivers aren't public service workers.

Taxes don't fund spending, it's the other way round. Spending gives rise to taxation.

Before the money spent on the wage increases returns to the treasury via taxation it will have stimulated economic activity in the domestic economy. Which is what we need.

David49

Ignore the last line

Public service workers may not directly influence inflation but taxes will rise to pay the extra or the service they provide will fall. Bus drivers get a pay rise but service frequency falls, or any other comparison.

Most bus drivers aren't public service workers.

Although this thread has suggested that inflation is caused by wage growth, it is not the only reason and indeed is rarely the reason.

We have just gone through a period of high inflation, and it was clearly not wage growth that caused it.

LizzieDrip

Thank you MaizieD

Ditto

There is always a lag between wage growth=more demand= potential inflation=GDP growth in response to more demand = drop in inflation.

I suspect/hope that inflation will drop back.

Reeves has little alternative if she pursues her economic model but to increase growth.

The question is how she gets that growth.