Do you ever wonder why prices seem to go up all the time but rarely, if ever, come down? Do you wonder why it is that companies must continually make, not just a profit, but an increased profit? Do you wonder, too, what is the relationship between wages and prices? I do.

These questions go to the heart of what we are currently calling the cost of living crisis. Why is it a crisis? If prices rise that, in and of itself, does not cause a crisis. Because it is not how much a good costs that matters but rather how much money I have to pay for that good. If a cup of coffee goes up from £2 to £2.10p and I am used to handing over a fiver to pay for it, then it simply means that I will have slightly less change. Hardly a crisis.

The relationship between wages, prices and goods is at one level quite simple. Our wages (or other income) determine how many goods we can buy at certain prices. If our wages rise but prices stay the same, then we can buy more goods. If prices rise and our wages stay the same, then we might not buy fewer goods but look for cheaper alternatives. In the short term, this is still not a crisis. So, when does it become a crisis?

Average weekly earnings in the UK are currently around £630 according to the Office for National Statistics. In January 2000 they were £307. This means that wages have increased by 105% in the past 23 years. However, over the same period prices have risen by 116%. What this means for average wage earners is that prices have risen faster than wages by approximately 11%. Cheaper alternatives will be sought to make up the difference. And, when that does not work, then we decide to do without certain things. The three cups of coffee each day become two. It’s only a crisis when, instead of being an individual act, lots of people are behaving in the same way. Every shop that closes down had customers at one point in time who could afford their wares. Over time lots of individual decisions to rein in their spending amount to a societal change. Woolworths, for example, once a fixture on British High Streets, now no longer exists.

Of course these figures, whilst interesting, only tell part of the story. One driver of inflation which is rarely looked at is share prices. You may wonder why share prices would be responsible for a cost of living crisis. Share prices represent the confidence investors have in the performance of companies listed on the Stock Exchange. The FTSE100, along with NASDAQ and other national stock exchanges, are an important indicator of the state of the global economy. Since 2000 share prices have risen by only 23% according to the website Trading Economics. In other words, whilst prices and wages have more than doubled over the same period, share prices have remained relatively stable. Why does this matter?

Companies rely on a positive stock market performance in order to attract the capital they require to expand. If one company goes into decline, it doesn’t matter too much to anybody not directly involved in that company. But when a number of companies go into decline that shows that the economy is in trouble. Companies going bust means, first and foremost, people losing jobs, incomes and opportunities. But, whilst other companies will sometimes take up the slack, that is not the case in a market where investor confidence is low.

For the past three years almost all investor confidence indices have been running in minus figures. This means that investors are pessimistic about the future; which means that they do not want to make ‘risky’ investments. For you and me that means that jobs that would be created in a positive economic environment will not exist. It also means that in a wave of pessimism companies will start to offload their workforce. For you and me that means the unemployment queue.

These investment pessimism cycles are, as the name suggests, cyclical. We all know of the boom and bust cycle. We don’t all necessarily know what causes them. Empirically, it is clearly the case that the boom periods are getting shorter and the bust periods longer. 

What has this to do with the price of cheese (or any other good)? When employers feel pessimistic they are less likely to expand and more likely to ‘batten down the hatches’. Their pessimism transmits to their employees who, fearing that their jobs may be on the line, will work harder and longer but for below inflation pay rises. It is better, after all, to have a wage that is falling in real terms than no wage at all. People tighten their belts. The little luxury items that they enjoy are bought less often. Holidays abroad become weekends in this country. New cars are delayed. Does it matter to you if your neighbour does not buy a new car this year? Probably not. Unless you work in the factory that manufactures them or one of the many industries that service those factories. In the 1960s nearly 5% of the British labour force were employed in car manufacturing plants. That was over 1 million workers directly employed plus all the service industries. Today car manufacturing employs fewer than 180,000 workers throughout the UK. 

Wages, cash, moolah if you prefer, is real. You can see it, even if increasingly it is electronic. You can decide how to spend your money and what things you can afford to buy. Every day every one of us makes decisions about what we can afford. Those decisions, relatively minor to us in most cases, affect others who may be relying on your patronage to survive. How confident we feel in our futures will determine quite what risks we are prepared to take; how much credit, assuming we can get any. A measure of this is the consumer confidence index. 

In 2000, according to the OECD, consumer confidence in the UK was at 101.3; it is currently 93.4. A measure above 100 indicates that consumers are confident about their future. Obviously, consumer confidence is, like investor confidence, far more complex than a single measure can provide. But it is worth noting that until 2008 UK confidence was always above both the OECD and EU averages. Perhaps the British are not quite as pessimistic as we tend to think. Of more significance to the current crisis is that since March 2020 we have been consistently below 100 (or to put that another way, we have been pessimistic about our household finances for the past 3 years). Interestingly enough, in the period up to the election in May 1997, when Labour held huge leads in the polls and there was a genuine feeling that things ‘could only get better’ consumer confidence remained well above 100, only starting to fall again when people realised that under New Labour things were perfectly capable of getting worse.

Confidence is temporal. It comes and goes. But a crisis – that seems more permanent. What we can see is that a crisis is determined in part by confidence, in part by material conditions and in part by systemic pressures. That we are in a crisis will need no explanation to those struggling to make ends meet, but that it shows no sign of abating should surely make us stop and wonder why it is that profits must continue to rise, why it is that prices must continually go up, why it is that, when investors lack confidence in high returns on their investments, it is ordinary workers who suffer the consequences? We might also wonder why in a so-called democracy nobody is going to discuss how these things might change to the benefit of us all.

We promise that if you subscribe we will never take money from your bank account, won’t send you endless emails trying to get you to buy something you never wanted in the first place and we will never share your details with any third party.

What we will do is send you regular newsletters to keep you up to date with what we are doing and give you handy links to the content we create. You can choose which newsletters to receive or unsubscribe at any time.


Leave a Reply

Your email address will not be published. Required fields are marked *