Why and how inflation and falling wages hasn't bothered
the wealthy.
This week I want to look at
inflation and the cost of living crisis. There was a lot of fanfare last week
with the announcement that wage increases have finally passed the rate of
inflation. The full details of the announcement can be found here;
On the surface it sounds great, the
bedrock of a recovery is in place and good times are just around the corner.
But, if you look into what has happened over the last forty years and the consequences over the coming years, then a
different picture emerges.
These figures include all the high
ranking salaried jobs mainly in the banking and financial sector that we the
tax payer so happily saved back in 2008. These salaries have and are rising
faster than any other. These million pounds salaries and their huge
bonuses will adversely affect
this data, boosting the percentage higher and disproportionately. Our
Government does little to cap them as it encourages the City to make more and
more money. Just look at the figures involved, who else gets million pounds
salaries and two
hundred per cent bonuses?
Wages for the average person have
stagnated and inflation has eroded the spending power that this reduced income
can buy. For example average earnings adjusted for inflation have dropped 7.2
per cent since 2010 – leaving millions more than £2,000 a year worse off. This
is where the economy has been hurt.
In my research I came across this
article from the Daily Telegraph, from which I gleaned the following startling facts;
The research, using data provided
by the Office for National Statistics, found that draught lager had risen from
14p a pint in 1973 to £2.87 last year. Petrol prices were 17 times as high,
with the price of a litre of diesel growing to around £1.41, from 8p in 1973.
Wages have simply not kept up. From my own research from 1994 to the present
day average annual real earnings have only increased by 9.49%, while the retail
price index (RPI) has increased by 42.38%. Basically, the average salary can
buy a lot less than they did in 1994. You are officially worse off. This data
was taken from these figures;
The official method of measuring
inflation is the Consumer Price Index (CPI). The Retail Price Index (RPI) was
once used and is often still referred to. Both track the prices of things we
commonly use – food, clothing, transport, energy and so on.
Money supply which can fuel inflation
has grown faster than the economy. In 1971 there were 31 billion pounds in
circulation. Now there are just under £2,100 billion (£2.1 trillion), most of
it coming in Quantitive Easing (QE) in the last eight years. That is a sixty
seven fold increase and is a very important factor to understand. Are we sixty
seven times richer? Some people are. But
most of us aren't. This money supply has nearly all ended up in the assets of the well off.
Research by Positive Money shows that only about ten per cent of newly-created money has gone into the kind of consumer
goods tracked by CPI. So all CPI does is
measure the effects of about ten per cent of money creation.
Positive Money's research shows that thirteen per cent of newly-created money has gone into real businesses
that create jobs and boost economic growth; thirty seven per cent into financial markets and forty per cent into residential and commercial property. So the
staggering amount (77%) has gone into finance and property, money going to
money. The rich have had a field day.
Is it any wonder the financial
sector has grown so disproportionately large and powerful, or that the British
are so obsessed with houses? That's where the money's gone, the wealth gap just
got bigger.
Wages have not kept up with the sixty
seven-fold increase in money supply. They've
gone from about £2,000 in 1971 to around £25,000 today. Many families now find
themselves having to work longer hours, with both husband and wife working just
to raise a family, they are taking on larger debts and having fewer children
just to maintain an ordinary middle class lifestyle. Many of their children
face unprecedented levels of debt and, in many parts of the country, will never
be able to buy a house. In next week's blog I will examine just how impossible
it is to buy a house now and how inflation, rents and the lack of house
building is conspiring against you.
This Government quickly realised
that housing market is an easy way to try and stimulate the economy, and has
done everything in its power to create another housing bubble. Another worrying
outlook is that the last time countries were loaded with Government debt as we
are at the moment, they basically inflated that debt away. The best example of
this was after the Second World War.
Expect interest rates to go up,
they want them up in the long run in order to get the debt down over time.
Indeed if you look at our projected debts for the next few years in
inflation-adjusted terms (as opposed to a ratio of GDP) you can see the reason
why inflation must continue in the UK, and why it will almost certainly will be
helped higher by Mark Carney in some way. For lots of people mortgage payments
will become
a burden over the next ten
years. In my view before we all rush to load up on ultra-cheap mortgages, we
need to check we’re in a job that is certain to be awarded inflation-linked pay
rises, and this government does have a good track record at that!
What chance does a young person
have now to live a normal life? They come out of university with tens of
thousand pounds worth of debt, and now face a jobs market where wages are
suppressed, and an impossible task to buy an over inflated priced house. Even
if they can muster up the deposit, the income multiples and
questionnaires make it near
impossible.
However, in the parallel universe
things are just rosy. Today, the world’s 200 richest people made $13.9 billion.
In one single day, according to Bloomberg’s
Billionaires Index.
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