The language of the market performs a social function to obscure economic encounters. In this inflationary era, it’s worth noting that the “invisible hand” of the economy has not put up prices all at once. It is firms, free from government curbs, deciding that they can do that. In free markets, companies are meant to compete and undercut each other, driving prices and profits down. Yet this has been failing to happen. Instead, a new report from the trade union Unite reveals, company profits last year rose while real wages fell steeply. Workers are warned that they risk sparking a wage-price spiral if they demand pay rises to match living costs. In fact, Britain seems to be facing a profit-price spiral.
Unite’s argument is that UK plc has been able to charge more, with much of the higher prices juicing profits. From the trade union’s perspective, corporate greed has been the primary driver of high inflation. Its 165-page report makes a compelling case that firms, and their investors, are “profiteering” on the back of a crisis hitting workers hard. Even within key industries, there is talk of “price gouging”. When Sainsbury’s reported a doubling of profits last year to £730m, the supermarket insisted it wasn’t ramping up prices. But it accused its competitors of doing so.
Russia’s invasion of Ukraine in 2022 sent a shock wave through markets already reeling from a bumpy pandemic reopening and extreme droughts in crop-growing regions. Yet rising prices have not come from government spending or wage pressure. Inflation has, instead, been amplified by firms able to raise markups. Windfalls occur when costs don’t change but circumstances do. Bernard Looney, the boss of BP, last year said sky-high oil prices had turned his firm into a “cash machine”. Energy companies are profiting from a war overseas, while at the same time increasing wealth inequality in the UK. Mr Looney earned more than 170 times as much as his average employee last year, when his pay doubled to about £10m.
The report by Unite challenges the more mainstream position that prices were driven higher as pent-up savings and pandemic-stimulus cash was spent when the supply of goods and services had been constrained. With consumers lacking protections and workers unable to defend effectively their share of output, gains flowed to profits. Unite has good reason to believe the corporate sector is practising a form of “tacit collusion”, where firms can behave as if there were an agreement between them to maintain high prices. Its research also echoes recent work by US economists Isabella Weber and Evan Wasner on how emergencies are used to entrench “sellers’ inflation”.
What is clear is that neither market competition, nor government regulation, is doing much to tackle this problem. Rather both seem to be facilitating it. For all the talk of a high-wage economy, there is no sign of changing a model that relies on real wage restraint for competitiveness. High profits and low pay are not a side-effect but an intrinsic part of an economic system that has resulted in a lowering of living standards. With households carrying historically high levels of debt, rising interest rates are causing more people to question whether the division of spoils within the system is fair. Unite should be thanked for producing a report that shatters the notion that the public live under a just system of regulatory protections. They do not.
