The Economist - UK (2022-02-19)

8 Leaders TheEconomistFebruary19th 2022

T

he worldeconomy  keeps  producingnastyinflationsur­

prises.  In  January  consumer  prices  grew  bymorethanex­

pected in America, Britain and the euro zone, andAmerica’srate

of annual producer­price inflation stayed close to10%.Making

matters worse, fears that Russia would invade Ukrainesentthe

oil price to over $96 a barrel on February 14th, itshighestsince

2014. On both sides of the Atlantic financial marketshaverapidly
priced  in  more  monetary  tightening  in  2022,  assomecentral
bankers  have  begun  to  worry  in  public  that  theyfacea testof
their credibility.
Monetary  policymakers  are  scouring  labour markets for
signs that high inflation is becoming baked intoworkers’wage
demands, indicating the start of a wage­price spiral.Theyarein
an  awkward  spot,  because  the  idea  that  wages
are rising too fast is politically toxic. In America
annual wage growth of 5.7% is plainly inconsis­
tent with the Federal Reserve’s 2% inflation tar­
get. Yet President Joe Biden is celebrating rising
pay  while  left­wing  Democrats  blame  price
rises on corporate greed. There is plenty of fuss
elsewhere, too. Britain’s government has said it
does  not  support  a  call  by  Andrew  Bailey,  the
governor of the Bank of England, for workers to rein in their pay
demands. Christine Lagarde, head of the European Central Bank,
says she hopes to see wages rise, even as her colleagues warn of
the dangers of excessive pay growth.
In  the  popular  imagination  workers  are  often  canny  first
movers in a wage­price spiral, rather than its victims. Rising pay
pushes up costs for firms, which then increase prices to protect
profits. In part this is based on the experience of the late 1960s
and  1970s,  when  union  bosses  negotiated  above­inflation  pay
increases  for  their  members.  In  1974,  in  Germany’s  infamous
Kluncker-Runde,  Heinz  Kluncker,  a  combative  unionist,  won
public­sector workers a budget­busting 11% pay rise. 
In fact, high inflation often hurts workers. Over the past year

inflationhasbeenhigherthanwagegrowthineveryg7 country,

despitewidespread labourshortages. Unions are much less

powerfultodaythantheywereinthe1970sandscholarstypical­

lyfindthatpricesleadwages,ratherthanviceversa.Eveninthe

1970smanyworkerssufferedfromthewage­pricespiral.Inthat

decadeAmericanwagesgrewonlyhalfasfastasworkers’pro­

ductivity,justastodaywagesareyettocatchupwithsuchgains.

InEuropehighinflationismostlydowntoexpensiveenergy.

ButinAmericaitistheconsequenceofa tsunamiofspending,

theresultofstimuluschequesand lowinterestrates, over­

whelmingtheeconomy’scapacitytoexpandproduction.Firms

haveraisedpricesnottopassoncostsbuttocurbdemand,send­

ingprofitmarginssoaring(seeFinance&economicssection).

Asconsumer­priceinflationhasrisento7.5%,

it iscapital,notlabour,whichhashadtheupper

hand,feedingclaimsthatfirmsareprofiteer­

ing.Theoutcomeisperverse,notleastbecause

JeromePowell,theFed’schairman,hasoften

said thatthe mainjustification for stimulus

wastohelpworkersandtoreduceinequality.

Itispointless,however,toattempttobully

firms  or  workers  into  resisting  market  forces.

Just ask Japan, where the government has for years tried to deal

with  below­target  inflation  by  badgering  firms  to  raise  wages,

without success. The correct response to an economy that is too

hot or too cold is to adjust macroeconomic policy, not to inter­

fere with wage­ and price­setting.

It is important that the Fed raises interest rates quickly—and

that European policymakers stay vigilant. The longer inflation is

too high, the more painful it could be to bring it back down. The

wage­price  spirals  of  the  1970s  were  contained  only  after  tight

monetary policy induced a global downturn in which American

unemployment  peaked  at  nearly  11%.  If  central  bankers  once

again have to induce recessions to restore theircredibility on in­

flation, workers will pay the price for that, too.n

Workers havethemosttolosefroma wage-pricespiral

United States

% increase on a year earlier

8

4

0

2021 2022

Average hourly earnings

Consumer prices

The chicken and the peg

Inflation

C

anada’s reputationfor  impeccable  politeness  is  taking  a

knocking (see Americas section). In recent weeks crowds of

lorry­drivers  and  other  Canadians  protesting  against  covid­

restrictions have blocked public highways and camped outside

parliament  in  Ottawa.  Many  wave  placards  reading  “Fuck  Tru­

deau”, referring to their youthful prime minister, though the ex­

pletive  often  appears  with  a  maple  leaf  as  an  asterisk.  Nastier

messages  have  cropped  up,  too.  One  or  two  protesters  carried

flags emblazoned with swastikas, perhaps to suggest, absurdly,

that Canada’s covid restrictions are akin to Nazism. 

The  freedom  convoy,  as  the  hundreds  of  lorry­drivers  call

themselves, was sparked by the introduction of a covid vaccine

mandate in January. This requires all truckers who enter Canada

from the United States, as thousands of Canadian drivers do ev­

ery day, either to be jabbed or to endure a two­week quarantine. 

Although  most  Canadians  think  such  rules  are  reasonable,

the protesters have struck a chord with some. A vocal minority

are fed up with burdensome pandemic restrictions. Many of the

young, who have suffered job losses because of lockdowns de­

signed to protect their elders, are especially grumpy. The truck­

ers  have  received  both  verbal  and  monetary  support  from

abroad. Donald Trump, Fox News and a cacophony of populists

Justin Trudeau has handled vaccine protests atrociously

No, Canada

Free speech