Arguments about wages and inflation are spiralling out of control

It's difficult not to agree with the former Deputy Governor of the Bank of England, Sir John Gieve, who recently told the BBC’s Today programme in December 2022 that “…public sector pay increases don’t directly affect prices…”

There is also a strong case to be made that public sector wages are not in a position to “spillover” into private sector wages and drive them higher. Public sector pay is lagging too far behind the private sector and pay increases in the private sector are too far ahead of the public sector for this to be an issue. 

We will cover the absence of a “spillover” effect in part two of this blog. Meanwhile, back to Sir John Gieve, who said in the same interview that he does not believe public sector pay increases have a “major effect” on private sector pay.

But what about the argument that wage increases across the public and private sectors will lead to a wage price spiral? This is the argument that wages go up because of inflation, leading to prices going up because of increasing costs associated with wages, with this leading to demands for higher wages to address rising inflation. And so on in a never-ending spiral.